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Key Takeaways
Understand what counts as rental income and what does not.
Maintain organized records throughout the year for maximum tax efficiency.
Know the difference between repairs and improvements to claim deductions correctly.
Being a landlord during tax season can feel like navigating a constantly shifting maze, with your hard-earned money on the line.
You might be asking yourself whether that new water heater qualifies as a repair or an improvement, or whether you have missed out on deductions that could save you hundreds or even thousands of dollars.
At Fireside Property Management, we know that tax season does not have to be stressful. With the right knowledge and some proactive planning, it is possible to make tax season work in your favor and minimize what you owe.
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What Is Your Rental Income?
Before diving into strategies, it is important to understand how the IRS defines rental income. Not everything you collect from tenants is treated the same way for tax purposes.
According to the IRS, rental income includes:
Monthly rent payments.
Advance rent payments (even if they apply to future months).
Security deposits that are kept for damages or used as the last month’s rent.
Tenant-paid expenses (such as utilities paid by the tenant but deducted from their rent).
Lease cancellation fees.
Bartered services (for example, if a tenant paints the unit instead of paying rent, the fair market value is considered income).
If you return a security deposit at the end of the lease, you do not have to report it as income. However, if you keep part or all of it for repairs, that amount is taxable in the year you retain it.
Keep Meticulous Records
Keeping detailed and accurate records is one of the most effective ways to prepare for tax season. This is not only important during tax time but all year round.
Think of your record-keeping system as a financial safety net. Whether you use simple folders or a cloud-based accounting platform, the key is consistency. Records can also help you figure out how to increase income without raising rent.
Track every expense, payment, and transaction in real time. Having organized records can protect you in the event of an audit and make filing taxes significantly easier.
5 Helpful Tips for Navigating Tax Season
The IRS allows landlords to deduct certain ordinary and necessary expenses related to maintaining their rental properties. Knowing how and when to claim these deductions can help you reduce your overall tax liability.
1. Know Your Deductible Expenses
Understanding what you can deduct is essential. Many landlords are aware of the big-ticket deductions like mortgage interest and property taxes, but there are other expenses to consider as well. These include:
Mortgage interest.
Property taxes.
Repairs and maintenance.
Utilities (if you pay them).
Insurance premiums.
Advertising for new tenants.
Legal and property management fees.
Keep in mind, personal expenses and uncollected rent are not deductible. Also, improvements such as a new roof or kitchen remodel cannot be fully deducted in the year they are paid for. These must be capitalized and depreciated over time.
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2. Understand the Repairs vs. Improvements Distinction
One of the most common areas of confusion involves distinguishing between repairs and improvements.
Repairs are expenses that restore something to its original condition, such as fixing a leak or patching a hole in the wall. These are typically deductible in full in the year you incur the cost.
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Improvements, on the other hand, add value or extend the life of a property. Examples include replacing the roof, boosting curb appeal, or installing a new HVAC system. These must be depreciated over time rather than deducted in a single year.
If you are unsure how to categorize a specific expense, refer to IRS Publication 527 or consult with a qualified tax professional.
3. Leverage Depreciation to Your Advantage
Depreciation is a valuable tax benefit that many landlords overlook. It allows you to deduct the cost of your rental property gradually over time, even as the property potentially increases in market value.
Residential rental property can be depreciated over 27.5 years. This means you can deduct about 3.6% of the cost basis each year as a non-cash expense.
Note that land cannot be depreciated, only the structure. To determine the value of the land versus the building, use your property tax assessment or consult with an appraiser.
4. Do Not Overlook Form 1099-NEC
If you pay a contractor more than $600 in a year, you are legally required to issue them a Form 1099-NEC. This form reports non-employee compensation and is required by the IRS to ensure contractors properly report their income.
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This form must be sent to both the contractor and the IRS by the required deadlines. Missing this step could result in penalties and can weaken your ability to claim certain deductions.
5. Know When to Hire a Professional
If tax season still feels overwhelming, it might be time to bring in professional help. Whether it is sorting out depreciation or handling major property upgrades, the right guidance can save you time and money.
A knowledgeable property management company can assist with maximizing deductions, avoiding IRS red flags, and organizing your financial documentation. Fireside Property Management works year-round to help landlords stay compliant and financially prepared.
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Bottom Line
Tax season does not have to be a source of stress. By staying organized, knowing what counts as rental income, and understanding your deductible expenses, you can make the most of your rental property investment.
Fireside Property Management is here to support you with expert guidance so that you keep more of what you earn and avoid costly mistakes.
