Updated March 29, 2022
Owning rental real estate puts a different type of burden on you when it comes to tax time. Real estate rental income will impact state and federal taxes. Tax rules require property owners to report rental income on their tax returns. The good thing, though, is that you can also deduct certain expenses to help counter the increase in taxable income.
Jacksonville property managers can be an excellent resource for you in this process! The right property manager helps you understand expense deductions and how to justify them for your tax return. Here's what's important for real estate investors to know.
Determining the Accounting Method
One of the first things to consider when talking about your taxable income and expenses for your real estate investment properties is whether you are a cash basis or an accrual basis taxpayer. Deciding on a cash or accrual basis impacts taxable income and deductible expense recognition.
As a cash basis payer, you must report all rental income you receive in a specific tax year. For expenses, you deduct what you pay out in cash as well. If you are an accrual basis taxpayer you include the rental income for the year—whether you receive the funds or not. You must also include expenses for the year, even if you have not paid out of pocket yet for those costs. Cash basis and accrual basis depend largely on recognition of accounts receivable and accounts payable balances.
If any of this is confusing, work with a property manager in Jacksonville and an accountant!
Determining the Expenses You Can Deduct on a Tax Return
Real estate investment professionals encounter ordinary and necessary expenses that can help reduce tax burdens. When tracking annual expenses, everything from property repairs to landlord insurance premiums is on the table and eligible for deduction.
What are common ordinary and necessary expenses? One of the most common is the interest you pay to mortgage the property. Advertising and professional services (like your property manager) are also tax deductible considered ordinary expenses.
When you have Jacksonville property managers doing maintenance on your behalf, what they spend on supplies to help with the repairs and maintenance can also be critical. Work with your property manager and accountant to determine how supply costs work within allowed deductions.
Beware Expenses That Don't Qualify as a Deduction
One of the things you cannot deduct is the cost of improvements. Understanding the difference between "repairs" versus "improvements" is essential to qualifying legal deductions for your Jacksonville properties. However, you still want to retain the documentation around these improvements as they will come into play later from a tax standpoint. Should you ever sell the property, improvements such as additions on top of the initial property cost can deduct against whatever proceeds you get from the sale.
Improvements can also be something that you recognize and then deduct via depreciation over the useful life of that improvement. For example, if you were to replace the HVAC system of a rental property, the cost of that system would work as an asset on your tax return, and then depreciate or take a piece of its expense annually over the useful life.
Evidence of Documentation and Record-Keeping
Good documentation will go a long way towards the completion of your tax returns on time. When you are trying to deduct expenses, your tax preparer will be asking you for evidence of the expenses you claim. This will include things like receipts that you put out for supplies and receipts you paid to contractors.
If your tax return ever gets selected for audit, having this evidence is of paramount importance. When you work with Jacksonville property managers they can help retain this documentation for you.
How Property Managers Can Assist Come Tax Time
Jacksonville property managers can play a big role come tax time. They will be able to assist you with all the documentation of expenses, evidence of what you have spent to date over the year, and more. They also have a good understanding of what you can deduct, and what receipts you need to keep for your tax preparer.
The right property managers in Jacksonville will also assist in the management of finances and budgets. This next-level process will make tax preparation time easy. Property managers will have a good handle on your expenses already, beyond getting the maintenance done and managing costs against the set budget.
Be Ready for Taxes With a Property Manager
Be ready when tax time comes. If you want to have a good handle on your expenses and what you can deduct, work with a property manager—sooner rather than later! Spectrum Realty Services is here to help you track income, expenses, and find every applicable deduction. When you have the right partner to keep good records and maximize deductions, you experience better returns on your investments.
Learn more about finding the right property manager! Download our free "Guide to Finding the Best Jacksonville Property Management Company today."