It's easy to feel disheartened when you see expenses that you've made to maintain your Eldersburg rental property come out of your checking account. After all, a single paid invoice might be more significant than the rent check you'll receive each month!
What's vital to remember is that expenses to maintain your property for a rental business are often tax-deductible. Rental property owners effectively receive a discount on many costs—including Eldersburg property management services! You pay for these costs with essentially "tax-free" dollars, and tracking those expenses can give you a nice boost to federal or state refund.
Are you accounting for every possible deduction every year? If not, we're here to help you learn what can you deduct, and why should you make an effort to track it. Keep reading to learn more about how a property manager helps with tax deductions!
Tax Deductions for Rental Property Companies
If you're paying on a mortgage for the rental property in question, you are allowed to deduct mortgage interest paid each year from your taxes. Whether your mortgage is paid off or not, property taxes are also tax-deductible.
Operating expenses, including maintenance, advertising, and utility bills for your office, are deductible on your taxes. This is where tracking your expenses becomes so valuable! When your company has an expense, the tax return can be the difference between making "very little" and making "quite a lot" in a given year.
And yes, in many cases, this means that Eldersburg property management fees are tax-deductible. Working with a property manager may also make it easier to track expenses. Rather than paying many different vendors to handle the many roles that a property manager plays, you pay one company and track expenses in a streamlined fashion.
What About Repairs vs. Improvements?
Repairs that bring your property back up to the standard level (fixing broken plumbing, replacing worn-out fixtures) are considered tax-deductible. At the same time, improvements (like adding on a patio or bedroom or upgrading to high-end kitchen countertops) are not tax-deductible. There are specific guidelines for the grey areas that are easy to find in the distinction between repairs and improvements, and the IRS provides a resource on this topic.
Don't Forget Depreciation
Finally, even major assets like rental properties depreciate in value over time. Things like roofs, siding, and the interior structure of the home slowly break down and therefore lose value.
Each year, the IRS approves a certain amount of write-off for certain kinds of property in the form of depreciation. The rules governing depreciation are complex, but that doesn't mean you should skip this deduction. Once you've worked out how to deduct depreciation from your taxes with a knowledgeable accountant, you can continue taking depreciation expenses over time—making sure your taxes are accurate and not artificially high.
Tax Strategy is Critical for Better Profit
Tracking and documenting all of these expenses takes time and energy, and many rental property owners are already very busy. So why do they do it? Ultimately, how you manage your taxes may be the difference between profitability and not being profitable since taxes represent such a sizeable chunk of the costs of running a business.
By deducting 100% of your tax-deductible expenses, you remove some of your highest-tax-bracket income and reduce your total bill substantially. When you keep incomplete records or only remember about 85% of your tax-deductible expenses, you leave money on the table. Margins can be very good in the rental business, but not if you let things like tax-deductible expenses slip through the cracks.
A great accountant can also help you decide which tax year is ideal to purchase major capital improvements and how to plan for potentially hefty tax bills. They recognize that timing purchases to the start of major revenue streams can help you to reduce up-and-down fluctuations in your tax bill each year. This helps rental property owners avoid hitting a cash shortage due to unexpected taxes.
Let Eldersburg Property Management Help You Keep Track of Tax-Relevant Info
If tracking all of these details seems overwhelming to you, or if you are nervous that you still don't quite understand which expenses are reasonable to deduct, your Eldersburg property management team can be a real asset. We've been helping property owners get and stay organized for years, and we can also provide recommendations for a local accountant who can optimize rental property ownership taxes.
When you place your trust in a property management company like Renters Warehouse BW Metro, you make it easier to stay on top of the books! We want our rental property owners to be so successful that get to build long-term relationships that support your success for many years to come. Helping real estate investors with tax strategy is absolutely part of that process! Download our guide today to learn more about what property management can do for you.
