Tax prep 101: Four steps for real estate investors

Tax prep 101: Four steps for real estate investors
by Dena Landon, posted in Legal & Taxes

Tax season is here for real estate investors, and keeping track of expenses and saving receipts, logging rents, and tracking depreciation…it all pays off. Literally.

Even if you have the support of a software program, however, there are still a few things you’ll need to do to prepare for tax season.

Track your expenses

It’s easy to fall behind on entering expenses and scanning receipts. Set aside a few hours to catch up on data entry, if needed, before sending files to your accountant. If time is rarely on your side (we get it), consider a receipt scanner app that does the work for you. Common deductions for real estate investors include:

To determine if you missed any write-offs, think back over your business’ activity from the prior year.

How many vacant units did you fill? Make sure you have accounted for all advertising costs associated with them. Check for work orders related to repairs, or review maintenance contracts, and see if you remembered to account for parts and supplies.

Depreciation schedules don’t tend to change after the initial purchase, but did you refinance or buy any new buildings this year? If you refinanced, you can write off the remaining amortization of original loan costs in one lump sum.

In general, you should have a tax-related event tied to all of the year’s activity. If you have questions about deducting any of these expenses, member of Stessa’s community can find help in our tax center.

Assemble all documents

Accountants, and the IRS, require that you have supporting documentation to back up all your numbers. While no one hopes for an audit, it’s best to be prepared. You can print off and check the boxes on this helpful tax checklist to help you pull together paperwork, but you’ll probably need all of the following:

  • Closing statements for any purchases, sales, and refinances of properties
  • 1098 mortgage interest statements from all lenders
  • Escrow statements detailing actual amounts paid for property taxes and insurance, or,
  • Property tax statements and insurance statements from your insurer
  • Schedule of capital improvements
  • Statements from lawn and snow removal companies, or for any subcontracted work
  • Home office square footage and related expenses
  • Realized investment gains and losses

If you’re unsure of what you’ll need, think of your business’ profit and loss statement. You are essentially reporting it in a different format when filing with the IRS. For every line item, advertising expenses, repairs, management fees, rents, you should have something that supports that revenue or expense.

Know how tax law changes impact your business

It’s been two tax seasons since the Tax Cuts & Jobs Act passed in 2017, but it’s still causing some confusion for real estate investors. The 20% pass-through deduction had one of the biggest impacts on real estate investors. With this new rule, if you file a single return and had taxable income below $157,500, or married and had taxable income below $315,000, you can deduct 20% of qualified business income.

You have to meet all the requirements to take the deduction. Some of the requirements relate to book-keeping, so verify that you’ve followed the rules before sending your records off. You might need to separate expenses and better document the hours spent performing rental services.

Know your filing dates

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If you miss an important date, it’ll cost you. If you owe taxes, the IRS charges interest on the balance owed until it’s paid in full.

Partnerships have to file by March 15th, 2020, individuals have until April 15th, 2020 (extended to July 15, 2020 amidst the COVID-19 pandemic). Your accountant will need all your information a few weeks ahead of the deadline. It’s a good idea to build in time for them to ask questions and request additional information, too.

If you did divest or acquire, your accountant will need your closing statement. But what if you can’t find the paperwork on time? It’s not uncommon for business owners to file an extension. If you’re in a partnership, you’ll have until September 15th, 2020 to file with an extension. Individuals can push their taxes off until October 15th, 2020.

Keep in mind that you’ll pay 0.5% in interest per month on the estimated amount you owe for each month you wait to file, so you probably don’t want to wait until the extended deadline.

Now you’re ready to file…

Once you have everything ready, you can either sit down and prepare your taxes or make an appointment with a certified tax professional. Pulling everything together before you talk to your CPA saves you time and money, since most tax advisors charge by the hour.

Also be sure to check out the new Stessa Tax Center, which includes tips for using Stessa to organize your 2019 income and expenses, resources to help with complex tax matters, and a timeline of filing due dates.

Note: For those of you handling your own tax prep this year, we’ve partnered with TurboTax to make it easy to get your biggest possible refund. And if you do need help along the way, the TurboTax team answers your questions live anytime, as well as offers advice and even a final review from a TurboTax Live CPA. Stessa investors save up to $15 on TurboTax (we recommend the Premier package for most of you).