Did you just rent out your property because of a relocation downsizing or simply because you could not sell it? Whether you wanted this or not, the fact is that the IRS now considers you a landlord or property manager. Know what that means? Yes, you will have to pay taxes on the rental property, just like everyone else.
Though this does mean that you will have to show an increased income to the IRS, there is actually a good part of it as well. You can make use of more deductions, which will reduce your taxes for you. So how will you manage all these taxes? Here is what we advise.
Fill out the forms
Tax time is here. Get your IRS 1040 Form Schedule E and mention your rental income on it. You will also have to give details on all the expenses you made on that properly such as taxes, interest amounts and HOA fees. All of these are deductible along with anything else that can be regarded as a business operation. Yes, this also includes costs for landscaping, repairs and the like.
Deduct all business expenses from the rental amount and you will arise at the taxable income, which you will then mention on the 1040 form. This amount can either be negative or positive.
Utilize deprecation
When rent is your source of income, you can also make use of depreciation as a deduction. According to a reputed tax accountant, this is one of the largest deductions that you can take and it will greatly lower your taxes. Depreciation amount is calculated by using your depreciable basis and tax basis. This value is then separated into building and land value, which is the depreciable basis. The deduction amount can be calculated by dividing the depreciable basis by 27.5 years. Yes, this may sound a bit complicated, so you should refer to a tax accountant before you fill out your form.
Determine your tax amount
Okay, you are done with all the calculations. Now transfer the results of Schedule A on the 1040 form. If the amount is a loss, you will have to pay lesser taxes. It is otherwise, you will have to pay an increased tax amount.
Indeed, all of the above may appear confusing to you, but seek professional help if you want to pay the lowest amounts possible.
