Business Management

What the IRS Said About July 15 Tax Deadline (Plus, How to Prepare as a Real Estate Investor)

Expertise: Landlording & Rental Properties
28 Articles Written
July 15 pinned on a calendar to remind you an important appointment.

In the midst of the coronavirus pandemic earlier this year, the Internal Revenue Service postponed 2020’s April 15 tax-filing deadline to July 15. Then last week, Treasury Secretary Steven Mnuchin mentioned that date may be moved again. But the verdict’s in, The Wall Street Journal announced yesterday:

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“The Treasury Department and Internal Revenue Service said the deadline to file and pay 2019 taxes by July 15 wouldn’t be extended further, drawing a line under the administration’s consideration of such a move.”

So, if you have yet to get started, it’s time to stop stalling and knock out your 2019 tax return.

Tax Benefits Available to Real Estate Investors: Complicated But Worth It

Filing taxes is a complex process, and when you add real estate investments into the mix, the whole undertaking can suddenly seem overwhelming. There are many benefits to investing in real estate—tax deductions and credits included—but first, it’s important to understand how you can prepare to most efficiently file your taxes.

A close friend is a property manager, and one of his clients owns a rental property in the United States. The client lives in Spain, where she is considered a full-time resident. The client (let's call her Sarah) reported her income last year under a "single-member," U.S.-licensed LLC and has a U.S. tax ID number.

Related: The Ultimate Guide to Real Estate Taxes & Deductions

As the property manager, my friend had to do significant research to find out which form was correct for Sarah to file and came to the conclusion that Form 1042-S would be the best option to report rental income subject to withholding for a client who lives in a foreign country. My friend also discovered that the IRS disregards LLCs that are “single-member” for tax purposes, which means that rental income in these scenarios is taxed on the individual’s personal tax return. Instead, Sarah should have filled out form W-8ECI (W-9 for U.S. citizens), which is appropriate for U.S. property owners with a foreign address.

The moral of the story is that investing in real estate can easily complicate your tax filing process, especially if you work as a property manager and help others manage their investment properties. Issues may arise of which you weren’t previously aware, especially if you are new to investing. As such, here are some of the main considerations you should keep in mind to plan ahead, reduce your taxes, and minimize your risk of audit.

closeup of hand using scissors to cut paper that reads taxes

How to Make the Most of Tax Benefits & Deductions Available to Real Estate Investors

Steps to Take at the Beginning of the Year

1. Verify vendor and contractor information

Touch base with each vendor or contractor you've worked with throughout the year, and make sure you have the correct federal tax ID number and mailing address. If you are a property manager, this includes reaching out to each of your property owners.

2. Issue and file 1099-MISC forms

Typically, 1099-MISC forms must be sent to recipients by January 31 and to the IRS by January 31 if there is a nonemployee compensation amount in box 7. If there is no information in box 7 (this is rare), the deadline is extended slightly.

As a property manager or landlord, you are required to issue 1099s to any service provider who received compensation higher than $600 for work related to your investment property. It might seem easy to not issue 1099s as you hire handypeople or other laborers throughout the year, but penalties from the IRS can be quite steep and are not worth the risk.

Related: Estimating Rental Property Expenses: Insurance, Property Taxes, Repairs, Vacancy Rate, and More

Deductions as a Real Estate Investor

Deducting expenses related to managing a rental property is one of the main benefits of investing in real estate. Make sure to keep excellent records and do some research (or hire a professional) to look into all of the deductions and credits you may be eligible for.

Just a few examples include:

  • Property repairs and maintenance
  • Property tax
  • Insurance
  • Travel costs
  • Mortgage interest
  • Depreciation
  • Operating expenses

Business-related deductions often catch the eye of the IRS, so be sure you can provide proper receipts and can justify the business necessity of each claim in the chance that you are audited.

Retirement Account Funding

Most of the time, the deadline to fund retirement accounts for the previous year is April 15, but some specific accounts have a December 31 deadline in order to be deducted. It is crucial to plan ahead and know your tax deadline to ensure your accounts are in place by the correct deadline.

If your investment grows substantially over the course of a year, you may want to consider a Roth IRA to keep your profits tax-free. If your investment has modest growth or loses money over the course of a year, you may consider converting your Roth IRA to a traditional IRA without facing any taxes or penalties.

Understanding your options and what will work best for your portfolio can have some significant tax advantages.

worker standing on roof installing new tiles

Pre-Paying Taxes and Expenses

No one likes the idea of handing over money to the IRS sooner than necessary, but in some cases, it makes the most sense. For example, if your investment property is generating substantial profit, it might be worthwhile to pre-pay recurring bills that aren’t likely to change—think insurance, disposal, landscaping—to bring your income level down for the year.

On the other hand, if your investment is going to be negative, you may be able to write off your losses and expenses to show no income.

Another option to consider before tax season to reduce your taxable income is to purchase items or make other pending repairs. Replacing worn-out appliances, repainting, mending broken fences, and other similar activities can turn out to be a wise investment.

Thinking of Selling?

Selling an investment property is not a decision to be taken lightly, and the tax pros and cons should be carefully considered before pulling the trigger. Selling your property at a gain in a year during which you have many tax breaks (and therefore less taxable income) can be a strategic move. But every situation is unique and depends on your local market, so be sure to consult with a tax advisor or financial planner before you make the official decision to sell.

Protecting Your Data During Tax Season

Each and every day, data theft puts our personal and financial information at risk. Besides the holiday shopping season, tax season is one of the most popular periods of the year for cybersecurity issues.

Of course, we want to keep our personal information safe, but you are at an increased risk if you act as a property manager and are also responsible for the information of your clients and tenants. There are steps you can take to prevent theft and keep your data safe during tax season:

  • Use strong, unique passwords for each of your online accounts
  • Take advantage of two-factor authentication whenever possible on financial, email, and social media accounts
  • Avoid conducting business or personal transactions on unsecured wifi in public locations
  • Use caution when opening emails or answering phone calls—the IRS will not initiate contact with taxpayers by email or phone to request personal or financial information
  • Check credit monitoring services for any activity you don’t recognize

Filing taxes as a real estate investor will probably always be a bit complicated, but you can make the process easier on yourself by keeping detailed records and documentation and planning ahead as much as possible. If you have any questions or are unclear on any part of the tax filing process, you should always consult a tax professional, CPA, or attorney familiar with rental properties in your state.

Questions? Comments? Other advice you’d offer investors? 

Join the discussion below.

Aside from being a landlord and real estate investor himself, Nathan founded Rentec Direct, a software company that serves the rental industry. Today he works with over 13,000 landlords and proper...
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    Trish Luna Rental Property Investor from Garfield, NJ
    Replied 7 months ago
    Great article! Wondering if I need to send a 1099 to the plumbing company that services my furnace, water heaters and A/C on my duplex for $600 per year? Isn’t their receipt good enough for IRS? I just want to be clear.
    Nathan Miller Property Manager from Grants Pass, OR
    Replied 7 months ago
    Hi Trish, You would think it would be cut and dry wouldn't you? For something as simple as sending a tax form to a vendor or not you would think the IRS would have simple yes/no answer for you. But, the answer depends on the type of company your vendor is registered as with the IRS. If they are a S Corp, C Corp, or LLC with S Corp election then you do not have to send a 1099. If they are a sole proprietor or LLC (without S election) then you do. However, there's also no harm in sending a 1099 to them even if they are a S or C corp, so that's your safest best if you are unsure. Also, if you pay your bills to the vendor by credit card, then a 1099 is not necessary as the credit card companies will send a 1099-K to the vendor automatically, which is sufficient for the IRS. The easiest way to find out their corporate type is to just request they send you a current W-9. Every vendor is required by the IRS to provide it to you upon request. When I ask for them, I usually just send a link to the form at the IRS website with the request. https://www.irs.gov/pub/irs-pdf/fw9.pdf
    Amy A. from Portland, Maine
    Replied 7 months ago
    I had a property manager 1099 me the same income that section 8 sent me a 1099 for. Watch out for this!
    Nathan Miller Property Manager from Grants Pass, OR
    Replied 7 months ago
    That's something you might want to discuss with your PM. If you get two 1099's that equal X amount total, but only pay tax on Y amount it's something that can trigger the IRS to scrutinize your return. It's easy to explain, but it's always better off not having to be put in a position of justifying your income to the IRS.
    Rick Dwelle Investor from Vacaville, CA
    Replied 7 months ago
    Nathan So what happens if you don’t send out a 1099 to the contractor safe for last year’s taxes 2019. Is it too late to send one out. Didn’t know I had to send him one.
    Nathan Miller Property Manager from Grants Pass, OR
    Replied 7 months ago
    At this point if you do send one it will be late, and the IRS will probably issue a penalty. They outline their penalties here: https://www.irs.gov/government-entities/federal-state-local-governments/increase-in-information-return-penalties. The longer you wait, the higher the penalty, but it does appear to cap at $550 times two. If you do send the 1099 now you are actively notifying the IRS that you are late. If you don't send one, they may never know, unless your contractor gets audited. It's a risk either way, that you may just want to discuss with your CPA before making the decision either way. You might also ask your contractor for a W-9. If they happen to be elected as an S corp, or are a C corp, then you don't have to send one anyway.
    Michael Baum from Olympia, Washington
    Replied 7 months ago
    Did you pay your contractor with a credit card? Nathan mentioned that the credit card companies will send a 1099-K to the vendor. We had a new A/C unit installed last year to the tune of $4600 and paid with a credit card. We didn't need to send a 1099 according to our CPA.
    Mark Alford
    Replied 6 months ago
    Great tax advice. Anybody have experience with a CPA in New Hampshire who is skilled at providing tax advice to real estate investors?
    Marian Henry
    Replied 6 months ago
    HI Nathan, The IRS W-9 form requests their social security number. Do people easily fill this out for you? I know many are not comfortable sharing that info. Let me know how you handle that! Thanks, Marian Henry
    Nathan Miller Property Manager from Grants Pass, OR
    Replied 6 months ago
    Hi Marian, The IRS requires that they provide their SSN, so I just point them back to the IRS and remind them that it's their rule, not mine. I often also mention that if they are uncomfortable releasing their SSN for purposes like this that it's super easy to apply for an EIN and they are issued an EIN instantly (https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online).