Cut your rental property’s tax bill with these tips

As many look for ways to either diversify their investments or increase their income, many consider renting their current homes or investing in rental properties.

If you are in the rental business or are considering it, here are some tax tips to consider.

Remember the 14-day rule

If you’re looking to rent your primary residence or cottage/cabin for just a couple weeks, the 14-day rule is a good one to remember. As long as you rent out your property for no more than 14 days every year, you don’t have to report the income on your tax return. If you do go over the 14-day limit — even for one day — you’ll have to pay tax on the entire amount of rental income you earned and treat your rental property like a business. So be deliberate about how involved in the rental game you wish to be.

Pay attention to the calendar

If you include your rental property(s) as part of your individual tax return, your rental business most likely uses the cash-basis method of accounting. This means that rental payments are taxable in the month received, not during the month they are applied to the rental balance. On the other hand, if you have investment property that you are renting out and treat it as a business, you often have the ability to manage profits and expenses by switching from cash basis to accrual basis.

Record security deposits as a liability

Be careful not to include security deposits on your tax return as taxable income when a tenant first moves into your property. These deposits are actually liabilities that still belong to your tenant(s). If you use some or all of a deposit to cover repairs after a tenant moves out, you’ll then report that part of the deposit as income with a corresponding business expense.

Keep personal

and rental business activities separate

Create a separate bank account for your rental property to keep your business income and expenses separate from your personal activities. Also consider whether owning your property via a limited liability company for legal protection makes sense for your situation.

Reconcile your bank accounts once a month

Keeping accurate books will help ensure that you don’t accidentally report too much rental income on your tax return or forget to include all possible rental expenses. So, consider reconciling your bank accounts at least once a month.

Pay attention to local and state requirements

You are considered a landlord in the eyes of the city, county, and state in which your rental property is located. So, know the rules for your area and follow them. Certain properties are in the crosshairs of many municipalities across the U.S. with the proliferation of short-term rentals over the last several years, which has led to many complaints from nearby neighbors.

Owning a rental property can provide a lucrative income stream, but it also comes with complicated rules to follow. By following these steps, you can simplify the tax filing process and avoid unnecessary stress as deadlines approach.

One of my primary objectives is to help you achieve your financial goals through a holistic approach that is tax-efficient in my wealth management and tax resolution practice.

For more information, visit www.fredtfoxiii.com.