Landlord Guide to Property Tax Assessment

Running a rental business is not cheap, and there are several costs that property owners have to account for at the end of the year. Thankfully, the IRS knows, and many expenses are eligible for deduction according to their policy. Despite that leverage, many landlords still miss out on the opportunity to keep some money in their pocket or spend a lot of money on a professional to help them. If you read our article on 2021 rental property tax tips, you might have picked up on some helpful tricks real estate investors should know.

Well, in this article, we'll be revealing more tips and giving you a detailed landlord guide to property tax assessment. So if you'd like to start doing your taxes like a pro or save some extra cash on outsourcing to accountants, read till the end.

Section A: Eligible Rental Deductibles

●     Property Taxes

Since property taxes often cost a lot of money, eliminating them from your taxable income could be a huge relief. These are taxes payable to your municipality, and it varies depending on your rental type and location. In other words, having a single-family unit in neighborhood A could cost you $4,000 in property taxes, but only $2,000 in neighborhood B. Generally, these amounts are calculated using the average income. Thus, low-income areas pay less. The acquired funds are then funneled into schools, hospitals, and other communal needs^[1]. 

●     Mortgage Interest

Considering that most property owners have to take out a loan to purchase their investment, many landlords can take advantage of the fact that mortgage interests are deductible. Thus, it's safe to say this expense is pretty much standard. However, if you're unsure how much interest you're paying on your loan because the payments are automated, there's a simple way to find out. Usually, when you borrow the money, you receive an annual tax form called 1098. This form is your mortgage interest statement and shows you the total interest you paid. Since you typically receive this document from your lender, you can go ahead and input the full amount as it would be accurate. The same applies to landlords with impounded property taxes. Besides that, Maine landlords can also count on getting some more cashback through the proposed increase in taxpayer rebate by 2023.

●     Travel

Landlords rarely live on the same properties as their tenants, which means they have to transport themselves when there's a need for them to be physically present. Sometimes the trip could be a short car ride away from one district to another, and other times it could mean traveling to another state. In either case, these necessary travel expenses are tax-deductible. You might want to look at publication 463 by the IRS, which specifies the latest requirements for travel, gift, and car expenses^[2].

●     Advertising

Experts usually recommend that you make room for at least two months of vacancy in your budget. That tells you vacancies are tightly tethered to running a real estate business, and every landlord should anticipate it. However, filling up vacancies is no easy task, and it often costs money to advertise online and in traditional media. Then there might be other associated costs such as virtual staging or tours to reach a bigger market. Of course, we can't exclude the commission you might have to pay to your real estate agent and other professionals. They can get quite hefty when you sum up all these costs, so it's great to know that they're also tax-deductible.

●     Salaries

Many landlords can get by with managing their units themselves, but it takes a team for property owners with a vast portfolio. Thus, if you have everyday employees such as property managers, cleaners, and stand-by repair workers, you need to pay them weekly or monthly. So you can legally deduct their wages, compensation, and other gifts from your taxes.

●     Utilities

Gas, water, electricity, and other appliance or furniture-based property costs fall under utilities. If you are responsible for these payments, you may also deduct them from your taxable income.

●     Depreciation

Landlords also receive an allowance for depreciation. Although real estate is good at edging the effects of inflation and gaining value over time, one can still expect sufficient wear and tear. After all, you can't compare the integrity of a new building to one that's fifty years old. Thus, you can remove a certain amount annually from your taxable income to make up for that loss. Most landlords struggle with calculating depreciation accurately, but a tax calculator can take care of the rest if your property meets the criteria.

Section B: Filling your Schedule E Document

When you decide to become a landlord, you should prepare to pay taxes on your returns. Following the Department of Treasury and Internal Revenue Service, the proper way to account for supplemental income and loss is to fill out a Schedule E document. This paperwork is mandatory for both residential and commercial rental real estate. Here's some of the information you would have to provide:

You'll have to answer questions about your physical address, type of property, expenses, fair rental days, and more at the first stage. An optional section of this part that often confuses people is the question about 1099^[3]. To clarify, a 1099 form is a document for the internal revenue code that collects information on miscellaneous rental income and nonemployee compensation. For example, if you contract someone to do your landscaping for a specific period, you have to report how much you pay them in the 1099 form.

Tip: Under the section that inquires about fair rental days and personal use days, you have to fill in how many days your property is up for lease in a year. For example, if the apartment is a vacation rental, you might use it as a second home or getaway during some parts of the year. Note that those days will not count towards fair rental days and thus will reduce your deductibility. As a rule of thumb, you're typically entitled to a maximum of fourteen personal use days before the IRS starts discounting your deductibles. You should also note that their tenancy period will not count towards fair rental days if you charge your tenants significantly below fair market value. So if you're putting up a family member or friend at half the rent, you could also be losing on your eligible deductibles.

To illustrate what we've highlighted, let's create a hypothetical scenario. If your annual rent on a property is $24,000, that will come down to $2000 per month. Some expenses you might incur include advertisement ($150), cleaning and maintenance ($400),  insurance ($950), legal fees ($350), mortgage repayment ($2200), utilities ($2000), and more. That boils down to a total of $6,050. Mind you, most properties incur a lot more expenses, and you can include other costs such as repairs, commissions, supplies, depreciation, etc. One of the reasons you should get help from professionals is that a good property manager can help with accounting. Since their job is to monitor your investment operations, they can create a detailed tracking sheet of all these costs you incur over the year. Once you have your total value, you can deduct it from your annual rental income, which in this scenario would give us $17,950. However, passive income loss is another relevant terminology for landlords filing their taxes. It refers to the income you might have lost from previous years and applies to landlords who aren't real estate professionals. In other words, if you still have a day job, then you can further deduct this expense after filling out form 8582.

For this example, we're going to assume that our passive loss income is $1000, so if we deduct that from $17,950, we'll arrive at $16,950. That would represent the final value of your annual income that is eligible for a tax deduction. As you can see, it's beneficial to keep organized records of your expenses. Not only will it make it easier for you to figure out your deductibles, but it'll also save you money auditors might charge to help you straighten out the problem. Of course, that value would be smaller if we included more expenses such as depreciation.

It's not uncommon for people to get hung up on depreciation and input the wrong amount. A good way out of that problem is to remember that you can only deduct depreciation related to the building itself. In other words, you can't include the fall in the value of your appliances, but your foundation is fair game. Many tax accountants often associate 75% to the structure and 25% to the land. You might not bother with the math as tax calculators can take care of it once you input the relevant information. But if you're curious about how the numbers work, you can refer to the publication 9486 on the IRS website.

Conclusion

We hope you found it easy to follow this detailed landlord guide to property tax assessment. Although filing your taxes can be a dull and mundane task, it's significantly easier to complete a self-assessment if you keep proper track of your rental expenses. If you don't have a property manager or accountant who can help you, feel free to look for a profit/loss summary template that works for you. You could easily download one online, create a spreadsheet document, or rely on a property management app including accounting features. It would be best to start and build this habit at the beginning of the year because it might feel overwhelming if you wait till the last quarter.

^[1] San Antonio Independent School Dist. v. Rodriguez, 411 U.S. 1, 93 S. Ct. 1278, 36 L. Ed. 2d 16 (1973).

^[2] Silverton v. Commissioner, 37 T.C.M. (CCH) 142, 1978 T.C. Memo 22 (T.C. 1978).

^[3] IN RE FUSTOLO, No. 13-12692-JNF, Adv. P (Bankr. D. Mass. Feb. 4, 2019).