Mark Twain once said that the only difference between a taxman and a taxidermist is that the taxidermist leaves the skin. While that may be a bit of an exaggeration, it’s fair to say that real estate investors want to save as much skin as possible when paying taxes.
One of the best ways to maximize deductions and minimize taxes is by using Stessa, a Roofstock company, and TaxAct. First, we’ll discuss how TaxAct for rental property works, then explain the surprising advantages of using Stessa and TaxAct together for rental property.
- Options for tracking income and expenses for tax preparation are spreadsheets, accounting software, property management software, and Stessa and TaxAct.
- TaxAct is simple, easy-to-use software for filing federal and state tax returns online using rental property data collected throughout the year with Stessa.
- Rental property depreciation and capital gains information calculated with Stessa can be entered on TaxAct to file accurate tax returns.
Options for rental property accounting
A rental property accounting system helps a landlord improve the bottom line by accurately keeping track of income and expenses, assets and liabilities, owner’s equity, and depreciation.
There are 4 typical software solutions for rental property accounting and financial management.
A spreadsheet created using software such as Microsoft Excel, Numbers, Google Sheets, and Open Office Calc is the modern version of the handwritten ledger. To be fair, it’s easy to understand why some investors use spreadsheets. After all, nearly every computing device and smartphone come with a spreadsheet option or app preinstalled, and software is an easy go-to option for keeping track of basic income and expenses.
There are also quite a few options for downloading free spreadsheets online for rental property income and expenses, including the ones listed here.
Using a spreadsheet for rental property accounting may be the path of least resistance and may even work fine with one rental property or 2. But eventually, an investor may find that income and expenses are erroneously recorded, and valuable deductions used to reduce taxable net income are entirely overlooked.
Accounting software like Stessa, QuickBooks, TaxAct, and Wave are good, inexpensive spreadsheet alternatives. However, of these options, Stessa is the only accounting software specifically designed for rental property owners.
The other accounting software programs are generic and designed for all types of business users. While they can be customized for rental property, an investor needs to master the art of double-entry accounting and take the time to create a chart of accounts or hire someone to do the work.
While the concept of double-entry accounting is relatively straightforward, it can be quite complex.
For example, when a rental property is purchased using financing, the property purchase price is recorded as an asset on the real estate balance sheet, with the mortgage as an offsetting liability and the down payment as owner’s equity.
As rent payments are received, income is credited to the landlord’s bank account on the balance sheet and recorded as rental income on the profit and loss (P&L) statement. Conversely, when an invoice is paid, funds are debited from the bank account on the balance sheet and booked as an operating expense on the P&L.
One of the numerous benefits of using Stessa is that bank and mortgage accounts can be linked and synced to record income and expenses automatically. As a result, assets and liabilities are updated on the real estate balance sheet, and Stessa even keeps track of annual depreciation expenses while periodically updating estimated property value. As a result, landlords using Stessa have a more accurate idea of owner’s equity and can make more informed decisions to optimize performance and returns.
Property management system
A landlord looking for a full suite of property management tools may find property management software to be a good option. In addition to keeping track of income and expenses, many property management systems also provide tools and services to streamline a rental property business.
For example, property management software from Apartments.com (formerly Cozy) and Avail offer online options for marketing vacancies, screening prospective tenants, collecting rent payments and security deposits, and processing maintenance requests.
Features such as these make being a landlord easier and keep tenants happier, contributing to higher occupancy rates and low turnover costs. Cash flow may also be more solid and robust because tenant-friendly features may make it more likely that a tenant will pay the rent on time and take better care of the property.
According to the tenant screening service My Smart Move, scheduling recurring payments, reducing late rent payments with auto-reminders, and streamlining cash flow are 3 reasons landlords and tenants like online rent payments.
TaxAct for rental property
TaxAct is touted as a leading provider of affordable digital and downloadable tax preparation solutions for individuals, business owners, and tax professionals.
The company offers a comprehensive suite of online, downloadable, and mobile solutions to make DIY tax filing fast, easy, and affordable for individuals and small- and medium-sized business owners.
Unlike accounting software solutions, such as QuickBooks and Wave, TaxAct isn’t marketed as an all-in-one accounting solution for rental property owners. Instead, TaxAct focuses on providing a full suite of tax preparation products with comprehensive step-by-step guidance to help tax filers complete their taxes with the best possible results without paying a premium price.
How landlords use TaxAct
TaxAct offers 4 plans:
- Free: $0 federal return + $39.95 per state filed
- Deluxe: $46.95 + $54.95 per state filed
- Premier: $69.95 + $54.95 per state filed
- Self Employed: $94.95 + $54.95 per state filed
TaxAct recommends the Premier package for investors who need to report capital gains or losses and for those who own rental property. In addition to filing a federal and state return, an investor may be required to file a return for each state where rental property is owned.
Note that the above TaxAct pricing is as of April 2022. The price of tax preparation software often increases closer to tax time, which means the actual price paid may vary depending on when you use TaxAct to file your return.
The Premier package supports features including:
- W-2 income
- Unemployment income
- Retirement income
- Child tax credits
- Stimulus credit
- Stock gains and losses
- Other investments
- Sale of home
- Rental property income
- Royalty and Schedule K-1 income
- Foreign bank and financial accounts
Deductions and credits
- Current students
- Itemized deductions
- Child and dependents care
- Student loan interest
- Mortgage interest
- Real estate taxes
- Health Savings Account (HSA)
Additional features and support
- Prior year import
- Personalized My TaxPlan
- Deduction maximizer
- Free account and technical support
Ease of use
TaxAct provides tax-filing software for rental property owners that is simple and easy to use. Begin by choosing an online product and creating an account. After signing up, TaxAct guides you through the entire process of filing federal and state returns.
- Create an account: Choose a username and password and answer security questions.
- Personal information: Include your name, Social Security number, birth date, occupation, dependent information, filing status, and events that could affect your return (such as an upcoming marriage, divorce, or new addition to the family).
- Federal: This is used for the information for the federal return, including income, deductions, credits, additional taxes owed, and estimated taxes. After entering federal tax information, TaxAct provides a summary of federal taxes and an estimate of your federal taxes owed or refund due.
- State: Information is automatically transferred from your federal return. You will need to select the state in which to file your return and answer questions, including the county you live in, residency and veteran status, state additions to federal income or deduction, nonresident tax payments, and other state-specific information.
- Review: Check your federal and state return before filing. TaxAct reviews the information you’ve entered and will flag inconsistent or incomplete information, possible inaccuracies, and potential tax savings.
- Filing: Once you’re satisfied with your returns, you can e-file with TaxAct or print and file a paper return. Before doing so, you’ll need to enter your payment information.
- Payment: If you owe additional taxes, payment methods include direct withdrawal from a checking or savings account, EFTPS-OnLine (Electronic Federal Tax Payment Systems), credit card, or check or cash.
TaxAct saves your information and tax returns securely online to make filing federal and state returns in future years fast, easy, and accurate.
Why Stessa and TaxAct are the perfect match
While the Premier package has plenty of robust features, it doesn’t offer options for freelance income, business income, personalized business deductions, or calculating depreciation. To gain those features, you’ll need to upgrade to the Self Employed package or save money by signing up for a free account with Stessa.
Stessa and TaxAct are the perfect match to help real estate investors minimize taxes through automated income and expense tracking, itemizing rental property deductions according to Schedule E (Form 1040), and online tax preparation and filing.
After signing up for a free Stessa account, enter the address of each rental property, connect business banks accounts and mortgage accounts, and begin syncing income and expenses in real time throughout the year. Stessa’s balance sheet automatically keeps track of assets and liabilities, including property cost basis and depreciation, and periodically updates property values to provide a more accurate idea of owner’s equity.
The Stessa Tax Center makes tax season a breeze by aggregating transactions and preparing a personalized tax package that includes an income statement and net cash-flow report with data that can be entered when you file with TaxAct.