Becoming a landlord in today’s competitive real estate environment is not an easy task. In the first year, new landlords can feel completely overwhelmed, and many will fail in their endeavors because they’re not managing their finances properly and taking advantage of every opportunity. Among the most important things you should keep track of are your taxes and all the possibilities and incentives that come with them.
Whether you’re in the US, in the UK real estate market, or anywhere in the world, you should understand your local tax laws and research how you can leverage these laws to your advantage. You’d be surprised how much you can save on taxes, what you can write off, and how much money you could borrow to overcome a financial hurdle.
With that in mind, today we are taking a look at some essential tax tips that will help the new and overwhelmed landlords among you solidify your financial position.
Know when and if to get a tax loan
One of the first things you need to understand is that there are numerous benefits and perks you can take advantage of when paying your taxes for your first year as a landlord. Depending on your country’s tax laws and regulations, you should be able to get a detailed guide to paying taxes while taking advantage of tax rebates, extensions, and loans. By paying through a specific bank or payment platform, you could earn rebates and cash returns.
By applying for a tax extension, you can get some more time to pay your taxes without incurring additional fees. Or, you can apply for a tax loan with minimal interest to bridge this financial gap until your renting business starts turning a real profit. Be sure to research your local tax regulations and see which perks apply to your business model. Don’t be afraid to apply for a loan or an extension during this stressful first year.
Understand capital versus current expenses
The next thing about taxes you need to know is that tax laws typically dictate what can be expensed, but also when you can deduct it on your tax return. The IRS, for example, is very specific about these rules and regulations, and it pays to do your research if you’re operating in the US. You can deduct some expenses in the year in which they occurred, but you can deduct other expenses over several years.
To know precisely which expense you should deduct and when, you should understand the difference between capital and current expenses. A capital expense is a long-term, hefty investment into your property, like a renovation. A current expense is something like maintenance and utilities, advertising your property, insurance, and other smaller investments.
Log and deduct your travel expenses
You might not have known this before, but as a landlord, you are eligible for a tax deduction on your travel expenses. Suppose you are traveling from your home or office to your properties for maintenance, oversight, or any other business-related reason. In that case, you can easily deduct your travel costs from your taxes.
If you make an effort to track and document all of your travel expenses, you could save hundreds if not thousands of dollars every year on your tax deduction. You can deduct these expenses whether or not you have your own vehicle. If you have a car, you can deduct the costs of fuel and maintenance as well as parking fees, tolls, and even car insurance fees. If you’re using public transportation, you can also deduct this cost.
Know when you can write off mortgage interest
Many new landlords start off with one or more mortgages on their rental properties, which means that you are paying a hefty yearly interest. While this can be a huge expense for someone who just started their business venture, you should know that you may be able to write off your mortgage interest. This could save you thousands of dollars and help you turn your landlord side hustle into a full-time job.
Typically, in order to write off your mortgage interest, you will need to use the property for at least 14 days a year. You might also be able to deduct interest for only one primary and one secondary property. These properties need to be properly equipped with basic amenities like cooking, sleeping, and toilet facilities.
Deduct legal and professional fees
Many financially-savvy people or landlords who have some experience with business taxes would tell you that many professional services can be deducted from your taxes. If you’re employing consultants and advisors like attorneys, accountants, real estate agents, or any other professional advisors, make sure to deduct their fees from your taxes. It’s a simple yet effective way to save as much money as possible as a landlord.
New landlords certainly don’t have it easy, and as always, money is the biggest hurdle you need to overcome during that challenging first year. Use these tips to get a handle on your taxes and work the system to your favor to secure your financial position in 2021 and beyond.
Mariia serves as editor-in-chief and writer for the Rentberry and Landlord Tips blogs. She covers topics such as landlord-tenant laws, tips and advice for renters, investment opportunities in various cities, and more. She holds a master’s degree in strategic management, and you can find her articles in such publications as Yahoo! Finance, Forbes, Benzinga, and RealEstateAgent.