realestatetalks

An investor needs accurate records of his or her rental income and expenses to prepare the investor’s income tax return.

                The following items should be recorded to collect required income tax information for each individual property:

·         Rental Income/Capital Expenditures

·         Rental

·         Expense

·         Additional Information to include maintenance, advertisement, management fees, etc.

·         Sale of Rental Property

On the rental income form, enter all rents received even advance rents.  However, security deposits are not classified as rent.  Once the deposit is converted into paid rent or damages then it is calculate as rental income.  If the tenant performs services or the tenant pays for repairs and the investor compensate him or her through reduced rent, include the value of these services as rental income.  In addition, the investor will be entitled to an equivalent deduction for the expenses.

                Upkeep and maintenance of the property are considered rental expenses.  In addition, the cost of labor paid to contractor to maintain the property for the investor is a rental expense, as well. The payment to the contractor is income for the contractor; therefore, as an employer the investor needs to collect the social security number of the contractor so that the investor can withhold and pay employment taxes for the contractor.  The contractor will need to fill out W2 form.      

                Another expense that the investor will have is travel.  Travel include going to the rental property to collect the rent and trips to deposit the rent into the bank.  For mileage, keep a log. 

                Capital expenditures are expenditures that improve the useful life of the rental property.  Purchase of furniture or appliances for the tenant’s use are capital expenditures, as well.  These items may have a useful life of over one year and need to be depreciated.  For example, the difference between repair and replacement of a roof determines whether the item is an expense or capital expenditure.  If shingles on a roof is replacement, but not the whole roof replaced then the work is a deductible expense; however, if the entire roof is replaced then it is a capital expenditure because it extended the useful life of the property.

                If the property is used for both personal and business use then expense will need to separate between personal and rental use.  The interest, taxes, insurance, and utilities are partially deductible expense. On the other hand, repairs to the rental property are fully deductible expenses.   To determine the investor’s personal expenses, a business use percentage will be determined and this amount will be applied to the partially deductible expense to calculate the personal expense.

                Accurate recordkeeping will help the investor ensure that him or her get credit for every deduction that the investor is entitled too.  It is also important to keep receipts and payment records of all items listed.  Lastly, keep all records and closing papers of rental properties bought and sold.

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