3 Ways to Reduce Your Tax Burden
As a property manager, you are responsible for ensuring that properties under your care are well-maintained, generating income, and compliant with all relevant laws and regulations.
One important aspect of managing properties is understanding and managing your tax burden.
By taking steps to reduce your tax liability, you can keep more of your hard-earned income and invest it back into your properties.
In this post, we will discuss various strategies that you can use to reduce your tax burden as a property manager.
We'll begin by explaining the basics of rental property accounting.
Understanding Taxation for Property Managers
Understanding taxation is an essential aspect of being a property manager.
It involves knowing what taxes you are required to pay, how to calculate your tax liability, and how to take advantage of tax deductions and credits.
Here are some basic aspects of taxation that you should understand:
- As a property manager, you are required to pay federal, state, and local taxes on the income you earn from managing properties.
- The amount of taxes you owe is determined by your taxable income, which is calculated by subtracting your deductible expenses from your total income.
- Taxable income includes all income earned from property rentals, such as rent payments, late fees, and security deposits.
- Deductible expenses include any expenses that are necessary for managing your properties, such as repairs, maintenance, and property management fees.
Property managers are also required to pay several different types of taxes, including income tax, self-employment tax, and property taxes, so let's discuss these.
An income tax is a tax on the income you earn from managing properties. It is paid to both the federal and state governments.
Self-employment tax, however, is a tax that covers Social Security and Medicare. Property managers are considered self-employed, so they are required to pay this tax.
And finally, property tax is a tax paid to local governments based on the value of your properties.
Tax Deductions and Credits
You can take advantage of several tax benefits and credits to reduce your tax liability.
Deductions include expenses that are necessary for managing your properties (or investment property), such as repairs, maintenance, property management fees, and travel expenses.
Credits include tax breaks for investing in energy-efficient upgrades or employing certain types of workers, such as veterans or people with disabilities.
Tax laws are constantly changing, which can impact property owners and managers in various ways.
Our main piece of advice here is to stay informed and updated on new rules and regulations that might affect your rental business.
For example, the Tax Cuts and Jobs Act of 2017 introduced several changes to the tax code, including changes to depreciation rules and limits on deductions for state and local taxes, so ensure that you stay updated.
In the next section, we will discuss how to maximize tax deductions.
Maximizing Tax Deductions
One effective way to reduce your tax burden as a property manager is to take advantage of tax deductions.
Deductions are expenses paid that can be subtracted from your taxable income, reducing the amount of taxes you owe.
In this section, we will discuss some key deductions that property managers can take advantage of.
Deductible expenses are expenses that can be subtracted from your taxable income, which ultimately reduces the amount of taxes you owe.
Tracking these expenses throughout the year and deducting them from your taxable income, can reduce your overall tax liability and keep more of your hard-earned income.
Here are some examples of deductible expenses:
- Maintenance and Repairs: expenses related to the upkeep and repair of your properties are deductible. Examples include repairing leaky pipes, repainting walls, and replacing broken appliances.
- Travel Expenses: expenses related to traveling to and from your properties, such as mileage, parking fees, and tolls, are deductible.
- Home Office Expenses: if you have a dedicated workspace in your home used exclusively for property management activities, you can deduct a portion of your home-related expenses, such as rent or mortgage payments, utilities, and internet service.
- Insurance Premiums: insurance premiums for property damage, liability, and worker’s compensation are deductible.
Now that you know a little more about what entails a deductible expense, it's important to learn how to track them.
To take advantage of these deductions, it is essential to keep accurate records of your expenses throughout the year.
You can use bookkeeping software, spreadsheets, or property management software to track your expenses, including receipts, invoices, and payment records.
It is also important to separate personal expenses from business expenses to make sure that you are only deducting expenses that are necessary for managing your properties.
Depreciation deductions are a way for you to recover the cost of your properties over time, accounting for wear and tear and the declining value of your assets.
As a property manager, you can take depreciation deductions on the cost of your property, such as buildings, appliances, furniture, and equipment.
Depreciation deductions are calculated over a specific time, known as the asset's useful life.
The IRS has established guidelines for determining the useful life of different types of assets, and there are different methods for calculating depreciation, such as straight-line depreciation and accelerated depreciation.
To take advantage of depreciation deductions, you need to keep track of the cost of your property, the date it was placed in service, and the expected useful life of the property.
Maximizing your tax deductions can help you reduce your tax liability and keep more of your hard-earned income.
In the next section, we'll talk a little bit more about property depreciation.
Understanding Property Depreciation
One area of tax planning that is particularly important for property managers is property depreciation.
Property depreciation is a tax deduction that allows property managers to recover the cost of their property over time, accounting for wear and tear, the declining value of the property, and rental income.
There are different types of property depreciation, some of them include:
- Straight-Line Depreciation: this method calculates depreciation by dividing the cost of the property by the number of years in the property's useful life.
- Accelerated Depreciation: this method allows for larger depreciation deductions in the early years of the property's life and smaller deductions in later years. This method can be beneficial for property managers who expect to have a higher income in the early years of the property's life.
- Section 179 Depreciation: this method allows property managers to take a larger depreciation deduction in the first year of the property's life, rather than spreading the deduction over multiple years.
Calculating Property Depreciation
To calculate property depreciation, you need to determine the cost of the property, the property's useful life, and the method of depreciation you will use.
For example, if you purchased a rental property for $500,000 and it has a useful life of 27.5 years, you could use straight-line depreciation to calculate the annual depreciation deduction by dividing the cost by the useful life: $500,000 ÷ 27.5 = $18,182 per year.
By taking advantage of property depreciation, property managers can reduce their taxable income and lower their overall tax liability.
One thing worth noting is that if you sell a property for more than its depreciated value, you may be required to pay taxes on the gain. This is known as depreciation recapture.
Understanding property depreciation is a critical aspect of tax planning for property managers.
Choosing the right method of depreciation and accurately calculating depreciation deductions, can significantly reduce your tax liability and keep more of your hard-earned income.
As you've seen, property management accounting can get very difficult and there are many laws involved, so let's discuss that in the next section.
Staying Up to Date on Tax Laws
As a property manager, it is important to stay up to date on tax laws and regulations, as they can change frequently and have a significant impact on your tax liability.
Tax laws can affect everything from the deductions you can take to the tax rates you will be subject to.
Changes in tax laws can be made at the federal, state, and local levels, so it is important to stay informed of changes that could affect your property management business.
For example, tax laws could impact deductions for property expenses, depreciation schedules, or income tax rates, among other things.
To stay up to date on tax laws, property managers we recommend that you take the following steps:
- Research Tax Laws: Property managers should regularly research tax laws and regulations that impact their business. This can be done through government websites, tax publications, and industry associations.
- Consult with Professionals: Consulting with a tax professional can help property managers navigate complex tax laws and regulations. A tax professional can provide guidance on deductions, tax planning strategies, and compliance issues.
- Attend Training and Seminars: Property managers can attend training and seminars to learn about changes in tax laws and regulations. Industry associations, tax preparation services, and government agencies often provide these opportunities.
- Join Industry Associations: Joining industry associations can provide property managers with access to resources, networking opportunities, and educational events that can help them stay up to date on tax laws and regulations.
Staying up to date on tax laws and regulations will help you avoid potential penalties and fines, maximize tax deductions, and take advantage of tax planning opportunities to reduce your tax liability.
In conclusion, reducing your tax burden as a property manager is essential to the long-term success of your business.
By implementing the strategies discussed in this post, you can ensure that you are taking full advantage of deductions and credits, and staying up to date on tax laws and regulations.
Always remember that tax laws and regulations can change frequently, and it's crucial to stay informed about any changes that could affect your business.
By staying up to date on tax laws, consulting with professionals, attending training and seminars, and joining industry associations, you can remain proactive in reducing your tax liability.
Additionally, keeping track of deductible expenses and maximizing depreciation deductions can significantly reduce your tax burden.
We hope that this post has provided valuable insights and actionable strategies that can help you reduce your tax burden as a property manager!