Investing in Boston rental property allows you to take advantage of many tax benefits.
The day will come when you have to prove what you’ve earned and spent on that investment property.
Maintaining a system of detailed, accurate, and transparent tax records will help you when it’s time to file and if you ever find yourself in the unfortunate situation of being audited.
Tax time is rarely fun for anyone, and if you can create a great system of collecting, filing, and organizing your financial records, you’ll find that you’re less stressed when it’s time to file those taxes. There’s also a lot less risk. Tax mistakes can be costly, and if there’s going to be an error – you want to catch it before the IRS does. Good documentation will help you do that.
Technology helps, and many Boston property management companies will have the latest property management software, which easily tracks income and expenses from month to month and generates as many reports and statements as you need. If you don’t have a property manager and you’re managing your property on your own, make sure you’re working with a great CPA or tax attorney.
We’ve put together a brief list of some of the most important documents all Boston landlords should have on file. These things will ensure you’re prepared and organized when it’s time to file those taxes.
Documenting Your Income
All of your rent needs to be accounted for because you’ll be claiming that as income on your taxes every year. Make sure you have an income statement that reflects how much was collected and when those funds were paid to you. If you are renting out multiple properties, it may help to separate your earnings by each property before adding up the total amount of your rental income for a given tax year.
If there’s other income outside of rent that you’ve collected, prepare to document that as well. Maybe you collected pet fees or there were other expenses that tenants paid you. Everything you earn needs to be recorded, even if the earnings are tax-deductible.
Documenting Your Expenses
Reporting your taxable income is non-negotiable. To offset some of that income, you’ll also want to claim some deductions on your taxes. These will be the expenses associated with renting out your property. Some of the most common deductions you’ll take include:
- Advertising and marketing costs
- Interest. Any interest you paid on your mortgage is tax-deductible. You’ll need to know exactly how much that was over the course of a tax year, and you’ll want to have your mortgage statements available in case you need to prove what you paid. Credit cards or loans that were used to support your property might also have interest charges. Calculate what that might have been so you can deduct it from your taxes. Again – make sure you have statements to show those exact amounts. You can’t deduct all the interest you paid on credit cards; only the interest on those charges related to your property.
- Professional service costs. Anything you paid in property management fees, legal fees, insurance bills, and any expenses related to professional work you needed, whether it’s a real estate commission or an accounting fee. Those are tax deductible, and you’ll need the right documentation to reflect what you paid.
Maintenance records will also be required.
You’re permitted to deduct the cost of maintenance and repairs that are required to keep your property habitable. You cannot deduct the costs of upgrades and improvements, however. The IRS may ask to see invoices, repair bills, and estimates that will document the work you’re deducting from your taxes. Make sure you have that available as you’re filing your taxes.
Best practices say you should keep all records and documents for five to seven years. For the current tax year, you’ll want to have some specific things at your fingertips so they’re easy to access. These are the invoices, receipts, and supporting paperwork that will help you prove deductions or clarify income.
You’ll also want to have a careful accounting of the security deposits that were collected and returned. Track your travel expenses that pertain to your rental property business because those can be deducted as well. You’ll need receipts for hotel, gas, and flights.
It’s also important for tax purposes to retain copies of checks or payments made to independent contractors or employees who assist with the leasing and management of your rental property.
Tax Planning Beyond the Current Tax Year
If you’ve invested in rental real estate long enough, you likely understand that you have to plan for the long term as well as the short term. While having your current tax documents easily accessible is important, don’t forget the forms and paperwork that you’ll need beyond this year. These are permanent records or documents you’ll want to hold onto for as long as you own your property.
Documents that reflect your existence as a company or an entity that earns income and has expenses include:
- Tenant lease agreements
- Tenant applications
- Property management contracts
- Legal documents
- Insurance policies
- Mortgage documents or banknote
Keep insurance policies handy as well as correspondence between you and your tenants, vendors, and business partners. You won’t necessarily need these at filing time, but the records themselves will build a foundation for tax documents and help you prove who you are and what you do.
Should Tax Records be in Print or Digital?
How you keep your documents is just as important as the list of documents you have on hand.
Most people have moved to digital files. Documents are safer in the cloud because you can access them from anywhere. However, it’s also a good idea to back up those electronic files with paper copies. If you’re dealing with a power outage or an internet outage, for example, running to your office for your paper insurance policy could be a lifesaver.
If you need help with accounting, bookkeeping, or general documentation, we’re your best resource. Contact us at Platinum Realty Group for all your Boston property management and real estate needs.