Did you have rental income in 2021? Whether you’ve been in the game for a while or you suddenly found yourself with a rental property on your hands, you probably already realize there are tax considerations involved. You may have had rental income from a vacation unit, residential unit, multi-family home, a portion of your own home, commercial property, or myriad other ways you could have received some payment from someone who used your property in some form or fashion. The IRS is going to look at several factors in determining how to tax you (or allow loss) on the property.
It may all seem daunting, but don’t lose hope; you have some wonderful tax opportunities now. But you need to report things correctly in order to take full advantage of these opportunities, and to keep the IRS satisfied (audits…yikes!) For example, you may know that you can take depreciation on a rental property, but do you know how to calculate it? Do you know your cost of the property vs. the fair market value when you started renting it? Do you know how much the land is worth (land is not depreciable)? Do you know where to report all of these things on your tax return? Many people get into all sorts of trouble in the area of depreciation alone.
But there are even more questions:
- Is your income active or passive?
- Can you be classified as a real estate professional?
- Do you have multiple properties?
- Are you using any for personal use? If so, how much?
- Do you know which income is taxable and which expenses are deductible?
- Do you know which are only cash flow items that don’t get reported on a tax return (i.e. rental deposits and mortgage payments)?
- Do you know which forms to use?
- And the list goes on…
The fact is, rental income and the tax effects of it are a complicated business, and we strongly encourage you not to go it alone here. Tax professionals have put in the hours and gained the knowledge required to make this a much simpler part of your life. Take advantage!
One more thing: if you are looking to get out of a rental property, there are some definite tax advantaged ways to sell it. You can save thousands or more if you structure the sale properly, even to the point of paying no tax now…potentially. All it takes is thinking just a little outside the conventional way of selling property. For example, whether you seller finance, 1031 exchange, lease option, or even convert it to your main home, you have options that your tax professional can help you sort through. But you have to make all these decisions before you sell the property, because after the sale is done, you’re locked in. So contact us BEFORE you decide to sell your property so we can see what option is right for you.
Until then, happy landlording!
-Heritage Accounting and Tax Services