Rental property owners have a lot of flexibility when it comes to leasing their property. However, they must also remember to stay on top of their taxes. For example, failing to report rental income on your tax return can result in a hefty tax bill later on. While managing taxes as a new landlord can be frustrating, you should not become discouraged. If you are having difficulty managing your tax liability as a landlord, you should consult with an experienced Sacramento tax lawyer for rental properties. At the NewPoint Law Group, LLP, our tax attorneys have a wealth of experience managing rental property tax issues for residents of California that we will utilize to represent you. Our firm is here to explain the tax requirements for California rental property owners.
How to Manage Your Rental Income
To avoid missing out a possible tax deduction or avoid a tax penalty, you should keep thorough records regarding multiple aspects of your rental property. Knowing what needs to be reported as rental income is an important part of being a landlord. Rental income goes beyond the money that you regularly collect for someone residing in your rental property. For example, a security deposit must be reported as rental income if you do not return the entirety of it to your tenant.
It is important to note that you must report the income you receive from all your rental properties. Many times, this income must be reported in the year it is received despite whether the rent payment is for future lodgings. For example, if you receive an advance rent payment meant to pay for a tenant’s lodgings in the next year, it will count as income in the current year.
In addition to keeping track of your rental income, you should also keep track of any deductions you are entitled to. One consistent deduction you will be able to make for your rental property is the cost of cleaning and maintenance. For example, if you must repaint the walls or you repair appliances in the property, this can be used as a deduction. Other available deductions include:
Costs of advertising
Depreciation
Homeowner association fees
Pest control
Insurance premiums
To keep track of your rental income and deductions, you should keep records of documents like receipts, checks, bills, and any other documents related to the rental of the property. Also, be sure to document how many days you rented out your property. In California, if you rent your property out for 14 days or less, you may be able to claim that income tax-free.
Keeping thorough records will also assist you if the Internal Revenue Service decides to audit your tax return. To learn more about documenting rental income and deductions, you should consult with an experienced California tax lawyer.
How to File Your California Tax Return as a Landlord
If you have rented out one or multiple properties, you must report your income and expenses using Form 1040, Schedule E, Part I. If you have more than three rental properties, you will have to fill out multiple Form 1040s. However, before you fill out your Form 1040, you should make sure you have the following information ready:
The purchase price of the rental property that you are leasing
The total depreciation and annual depreciation you are claiming for this year
How much you earned by renting the property
Any security deposits or advance rent payments you received
It is also important to remember that you cannot claim a deduction for improving your home. For example, if you add a swimming pool to your rental property, this cannot be used as a deductible.
Additionally, if the rental expenses for one property exceed the amount of income for that property, you may be able to net that loss against your other properties. However, if all your rental properties are operating at a loss, you may not be able to claim a deduction at all. You can combine up to $25,000 in losses from all your rental properties every year. These losses may even be carried over to a subsequent tax year under certain circumstances.
Our California Tax Preparation Attorneys Can Help You File Your Return
If you need assistance calculating your rental income, you should contact an experienced California tax preparation attorney today. The NewPoint Law Group, LLP is prepared to help you sort out your rental income taxes so that you could spend less time dealing with tedious tax laws. Our firm represents clients in Sacramento, Roseville, Folsom, and various other areas of California and we would be proud to represent you. To schedule a confidential legal consultation to discuss your tax requirements, call the NewPoint Law Group, LLP at 1 (800) 358-0305.
