Learn how to navigate tax season and make the most of your rental property investment.
Real estate has always been a golden investment opportunity for Americans, and that is still true. The market for apartment rentals in 2021 was valued at almost $170 billion, attracting more rental property owners to the space. The rise in demand for rental housing represents a potential source of income that can be extremely lucrative.
However, landlords must be aware of the tax liabilities and benefits that come with owning and renting property. A single wrong move can torpedo the profits landlords stand to make from rental income. Here are some tips that will help you navigate your tax obligations and make the most of your rental property.
1. Ensure that your documents are in order year-round
Record keeping is an important part of managing rental properties. Property owners and managers must keep records for their properties at all times but this can be challenging, especially since the IRS requires separate records for each rental property.
Each time a document is missing from a tax return, it creates significant administrative challenges for property owners and managers. These processes can be time- and resource-intensive, and the consequences are real — incorrectly filing tax returns can result in a higher tax bill or potential legal issues for property owners.
Proof of rental income, maintenance records, tax documents, and legal records are just some of the documents that property owners must keep over the entire course of a lease. Modern real estate software tools like Azibo allow rental property owners to manage these documents for multiple properties in a central hub.
2. Be aware of the available tax deductions
Rental properties are a business, so owners need to evaluate the expenses required for the upkeep and maintenance of their most important assets. Landlords can use a variety of tax benefits to reduce the impact that tax obligations can have on rental profits. One primary strategy is to claim all appropriate deductions. For example, landlords can write off rental property expenses like insurance, depreciation, and repairs. But different rental property types may have unique financial situations, so be sure to learn which deductions apply to each property.
3. Explore the qualified business income deduction while you still can
The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. Under this law, rental property owners can utilize the qualified business income (QBI) deduction to receive a 20% deduction on their tax bill. This is a significant deduction that can help property owners maximize their rental income.
However, the Biden administration has publicly discussed the possibility of eliminating this deduction for certain property owners. Since this change has not yet been formally introduced, rental property owners should make the most of this deduction while the TCJA is still in full effect.
4. Justify each deduction appropriately
While there are many deductions landlords can use to maximize their rental income, and many property owners apply for multiple deductions every year, it is important that each one is appropriately justified. Each deduction has specific requirements that property owners must understand and track before they can correctly claim it on their tax return.
Rental property owners should assess each property individually and consider which deductions it might be eligible for, then prepare the receipts and documentation.
5. Make use of tax extensions to get your documents in order
Managing tax returns for even a single property can seem daunting for new rental property owners and property managers — and doing so for multiple properties can be challenging for even the most seasoned investors.
To ensure that each document is prepared and submitted with no errors, landlords should refrain from rushing through the tax filing process and start preparing for tax season early. Rental property owners who need more time to prepare documents can apply for extensions that allow them to legally submit all the relevant forms after the April 15 tax deadline has passed.
Landlords who purchase and rent property may be intricately aware of their tax obligations, but may not always have the time or expertise to navigate an increasingly complex regulatory landscape. These tips can keep landlords on track during tax season, and Azibo’s solution makes managing rental property income and expenses significantly easier. Learn more about how Azibo's all-in-one financial platform for landlords can help you save time, stay organized, and grow your portfolio.
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This article and the Azibo Blog in general is intended for informational and educational purposes only. It is not investment, tax, financial planning, legal, or real estate advice. Please consult your own experts for advice in these areas. Azibo provides information believed to be accurate, but Azibo makes no representations or warranties about the accuracy or completeness of the information contained on this article or blog.