I just put an offer in on my first rental property! I’ve been back and forth a little bit with the sellers and it seems like we settled on terms that work for both of us! I’m super excited but I have a lack of knowledge as far as taxes are concerned.
If we close in the next few weeks what kind of tax implications can I expect when I file this year? I know my interest amongst other things are considered write offs, but are there any other major items I need to consider as far as taxes? If anyone can just give a brief overview that would be awesome!
With a rental property the money you spend getting it ready to rent adds onto your basis rather than being immediately deductible. If you do get it rented you'll have rental income to report. You can start taking depreciation. If you don't have a accountant doing your taxes, I highly recommend finding one.
@Andrew Gudmunson All business expenses for your rental are deductible. Common expenses include property taxes, maintenance fees, cleaning, mortgage interest, utilities, etc. You should hire a CPA to help you with your taxes. The last thing you want is to overpay the government in taxes because you missed deductions.
There are various stuff that you can deduct.
Rather than giving you the list, first, let me say that you can deduct expenses that meet these two criterions:
- Ordinary Course of Business
- Necessary in the course of business
Here is the list some of the items:
1) Mileage: any mileage that is associated with the rental activity. Use apps like MilesIQ to keep track of it. Note: If you go to the same meeting each month, you can do detail tracking for a month, and can use same detail to estimate expense for rest of the year.( If nothing changed)
2) Meals when traveling away from home - 50% is deductible unless the meal is provided to the general public (like Open houses) than it is 100% deductible. Open House - Meals and entertainment (Balloons)
3) Expenses for Meeting with investor
4) Expenses For Meeting with realtor
5)Going to investors meetings. Mileage and meals
6)Money paid for RE tax book is also the tax deduction.
7)Any expenses that help you with RE investment can be deducted. Eg. HOA fee - If HOA fees are not paid, business will incur fines, so it is necessary to make the profit in the business.
8) Marketing expense and advertising
9) Cleaning and maintenance
10)Commission (Expenses like commission, abstract fees, recording fees to obtain your mortgage are not deductible but rather capitalized )
12)Legal and other professional fees(Tax preparation for business, not personal part)
13)Management fee if applicable
14) Points- you generally cannot deduct the full amount the first year but have to deduct them over the term of the loan.
15) Repairs (Note always do repairs rather than improvements to rental because repairs are deductible right away and do not have to depreciate over few years as done for improvements. Repairs do not have to recapture when you sell the house too.)
17) Pre rental expenses ( expenses incurred before finding a tenant )
18) If you use your Car: This can include- oil changes, Maintenance, gas, repairs, parking, tolls, and depreciation. If you use the personal car, make sure to keep detail record so that CPA can prorate the expenses between personal and business.This can include- oil changes, Maintenance, gas, repairs, parking, tolls, and depreciation. If you use the personal car, make sure to keep detail record so that CPA can prorate the expenses between personal and business.
19) Any equipment you rent for the rental business.
20) Mortgage interest and property taxes
30There are many others and depends on specific situations.
Good list from CPAs
As a laymen, I get my properties 'in service' as quickly as possible.
Advertise it for rent before you do non-capital expense work. Work done on it while it's 'in service' will be deductible this year instead of just added to your cost basis.
When you first buy it, you won't have that many expenses. Basic tax software will take you through your basis minus land (I look at the county to see what they have) for your 2/12 or whatever annual depreciation and your financing costs.
Never hurts to meet with a pro @Andrew Gudmunson , but don't lose sleep over taxes this early in the game.
Potentially your largest tax benefit as a new real estate investor will come through depreciation, which is the expense associated with the annual wear and tear of the property. Even though your property is (hopefully) appreciating in value, the IRS allows investors to deduct the cost that is reflective of a decline in value.
The tricky part is in the details. As an investor, you'll want to make sure that you know the following:
- How much your property is worth for depreciation purposes (ie: the basis)?
- When does the depreciation actually begin?
- How long do you have to depreciate the property?
- How much do you get to deduct each year?
You might want to spend some time reading the BP articles and familiarize yourself with the basics of depreciation, or, better yet, find a CPA who can coach you on these fundamentals.
Good luck on getting to closing!
Thanks @Daniel Hyman I’ve been reading up a lot this week on taxes, just trying to understand the ins and outs more without letting myself become overwhelmed. BP has been great for that so far!
Join the Largest Real Estate Investing Community
Basic membership is free, forever.