With tax season ending a little more than a month ago... I'm sitting here thinking about all the questions I received this year about minimizing investor tax liability and wanted to share some quick tips.
The tax deductions you will receive as a landlord will only be as good as the expense records you keep. To maximize your annual deductions (or minimize your expenses) you should establish and maintain a meticulous record-keeping system for your rental properties. If you ever have to go through an IRS audit, you want to easily show that you were eligible to claim the deductions you did. On the other hand, for every 100 dollars in tax deductions, you will have approximately $25 in tax savings (for taxpayers in the 25% bracket), so it’s in your best interest to deduct everything in which you are entitled. Nolo's - Every Landlords Tax Deduction Guide is a great book for learning more about tax deductions and the filing requirements of landlords. This book is updated annually and always contains the most recent laws and tax codes.
One of the best ways to ensure you are maximizing your annual deductions is to keep neat, thorough and exact expense records. Be sure that you are keeping a hard copy or electronic files for receipts, invoices and anything else that documents your purchases. If you own more than one rental property, you should separate these records by property and year as required by your schedule E (the federal tax form completed for rental property owners).
A handwritten or electronic expense journal is also great to have and should coexist along with your files. Use your journal throughout the year and take notes that will help you or your accountant properly prepare your returns. You will want to use this journal to record explanations for unordinary expenses, miles traveled for your rental business, items you paid for in cash and anything else you may not remember when the time comes to file. Quicken Rental Property Manager is a terrific tool to help landlords maintain rental records and if set up properly, it can capture your expense records without data manual entry.
Separating your personal from your rental business banking is another great way to stay organized throughout the tax year. One of the first things you will want to do when becoming a landlord is to open a separate checking account (and maybe a credit card) for your rental business. Deposit all your rental income into this business checking and only pay for rental expenses from that account. Doing so will allow you to easily identify rental expenses when the time comes to file. It will also allow your monthly bank statements to serve as excellent reference tools from year to year, without the hassle of weeding out personal items.