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Landlord Taxes

Understanding Landlord Auto and Travel Expenses

Okay, maybe not the right vehicle for work commutes in terms of mileage expenses!

One of the categories on the IRS Form 1040 Schedule E is for “Auto and Travel” expenses. Here is a quick explanation to understanding this expense category. By tracking and understanding landlord auto and travel expenses, you will increase your expenses and thus lower the taxes you owe.

Do You Have a Home Office?

First, it is important to understand if you have a separate office for your landlording activity or if you work from home. Working from home is more advantageous.

  • If you work from home: You can deduct any travel that you make from your home for activities related to your rental properties. In this situation, your home office must be your principal place of business and be where you do administrative tasks. If this is the case, you can deduct trips from your home office to your rental properties and back.
  • If you work from an office for your rental activity: Unfortunately, if you have an office where you do your day-to-day rental management, you are limited by the “commuting rule.” Commuting expenses are non-deductible expenses. In general, trips from your office or home to and form your rental properties are not deductible due to this rule. So understanding landlord auto and travel expenses can affect deductibility opportunities.

How Much Can You Expense?

You might think it will take a lot of effort to calculate your automobile and travel expenses. Fortunately, the IRS provides a “standard mileage” rate which is a shortcut to calculating this expense.

With the standard mileage rate, you keep track of the miles that you travel (like trips to Home Depot for rental supplies). Once you have your mileage, you multiply it against the “standard mileage” rate for the year.

You can also do the “actual expense” method. With this method, you track the actual cost of using your car. However, most people do not use the “actual expense” method because it requires more work. You would need to track gas, oil, repairs, and depreciation using your own methodology.

Landlord Auto and Travel Expenses Saves You Money at Tax Time

In conclusion, a lot of landlords do not take the time to track auto and travel expenses. However, tracking it is fairly straightforward. Once you’ve calculated your expense for a trip, you can enter it into free landlord software like RentalIncomeExpense.com so it is stored online and a report can be generated at tax time.

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Landlord Taxes

Schedule E for Rental Property

Schedule E
Landlords need to file a schedule E with their form 1040 every tax year to report income (or loss) from rental property.

Schedule E is one of the many schedules that are part of the IRS form 1040. Taxpayers use Schedule E to report income and expenses from supplemental income. In contrast to earned income, supplemental income is not received through employment. Examples of supplemental income include rentals, royalties, and income from S corporations and partnerships. Landlords need to file a schedule E with their form 1040 every tax year to report income (or loss) from rental property.

Income on Schedule E

Schedule E is organized into five parts. Part I is the section focusing on income or loss from rental income. In this section, the primary income to complete falls on line 3: “Rents Received”. On this line, landlords report the rental income received from tenants for each identified property.

Expenses on Schedule E

To complete schedule E, landlords need to classify expenses based on 15 categories provided by the IRS. These expense categories include advertising, cleaning and maintenance, and insurance, just to name a few. In contrast to the simplicity of the rent reporting line, for expenses, landlords need to select a category for each expense for each property.

Completing schedule E is reasonably straightforward. In fact, it becomes very easy to complete if landlords use accounting software to track rental income and expenses. One in particular, RentalIncomeExpense.com, provides a schedule E helper report that mimics the schedule E. At tax time, landlords can provide this report to accountants for easy tax preparation. Best of all, RentalIncomeExpense.com is free!

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Landlord Taxes

Landlord Accounting Software vs Accountant

Landlord Accounting Software vs Accountant
Landlords should still track rental property income and expenses even if they use an accountant.

If I use an accountant for tax preparation, should I still use landlord accounting software? We think so. The two primary benefits are information and speed.

Information from Accounting Software

If you own property and rent it to receive income, then you are running a business. Anyone running a business should track income and expenses to understand how well or poorly the business is doing. Landlording is no exception. There are a variety of ways landlords can track rental property income and expenses. We recommend using landlord accounting software because of the powerful information it can provide for you through reports that tell you how your business is doing. For example, a profit and loss statement is a great financial review of the business’ revenues and expenses over a period of time. You may be deterred to pay for landlord accounting software when you are already paying an accountant. Do not fret because there are some excellent and free landlord income and expense tracking software such as RentalIncomeExpense.com and Avail.

Speed from Accounting Software

Maintaining good accounting records makes tax time easier. The reports you can generate from your rental property software will make your accountant’s work that much easier. You don’t have to give your accountant a shoebox full of random pieces of paper to sift through and figure out (which takes time!!). Instead, hand over a few reports that provide the details your accountant needs. For example, with RentalIncomeExpense.com, you can generate a Schedule E Helper report that mimics the Schedule E you will have to file with your taxes. And if your accountant charges by the hour, then by simply using free landlord accounting software to generate reports will save you more money because of the time savings!

The information and speed you will achieve when using landlord accounting software will complement the work your accountant does. You will make your accountant’s life easier, and they will likely thank you!

Categories
Landlord Taxes

Landlords and the 20% Pass Through Tax Break

landlords save taxes with 20% pass through tax break
For landlords, the 20% pass through entity tax break is a major deduction!

In the United States, the tax code has been widely seen as favorable for landlords. From reducing taxes via depreciation (a non-cash expense) to having losses offset salary income to being able to shelter capital gains with a 1031 exchange, there are numerous tax benefits to landlording. With the Tax Cuts and Jobs Act of 2017, a major new benefit was added: the ability to deduct up to 20% of your net rental income from your income tax (“the 20% pass through tax break”).

What is a “20% pass through tax break”?

Woah! The term “20% pass through tax break” can be confusing. What does this mean?

From 2018 through 2026 (when this tax break is scheduled to end), this tax break may allow landlords to only be taxed on 80% of rental net income; hence the “20% deduction”. This deduction is only for “pass-through entities” – these are landlords who run their rental business as a sole proprietor, LLC owner, partner or S corp shareholder. A “pass-through entity” is a common business type where individuals pay their profits on their individual taxpayer rates.

Which landlords qualify for this?

When the 2017 tax cuts were passed, qualifying for the “20% pass through tax break” was originally complicated and confusing.

Fortunately, the IRS came out with a “safe harbor” rule which simplified the determination of whether a landlord can qualify for the tax deduction:

  1. Separate books and records must be maintained to reflect the income and expenses for each rental real estate enterprise.
  2. At least 250 hours of rental services must be performed each year with respect to each rental real estate enterprise. The safe harbor provides a list of rental services that qualify for this requirement.
  3. Records must be kept regarding the hours of all services performed, description of all services performed, who performed the services, and when the services were performed.

Additionally, there are income qualifications. The full 20% is available if your taxable income is less than $157,500 as a single filer or $315,000 if married filing jointly. If your income is higher, a complicated calculation by your CPA or tax software will calculate the amount that can be deducted.

To qualify for the “20% pass through tax deduction”, keep good records!

Good landlords keep track of income and expenses. It helps you understand what kind of profit or loss you are making, and is invaluable at tax time. The “20% pass through tax break” for landlords – and the important “safe harbor” provisions to qualify – reinforce the importance of good recordkeeping.

Fortunately, for the first safe harbor provision, there are great online tools that can help you track rental income and expenses. One of them, RentalIncomeExpense.com, is even free!