Tax season is always a stressful time for landlords, but given some of the unique challenges of this past year, 2020 Tax Preparation During COVID-19 is particularly daunting. The good news is that there are things landlords can do to avoid being overwhelmed and to make sure they’re not paying too much.
With that in mind, here are a few tips to guide you through this tax season.
2020 COVID-19 Tax Relief and Tips
The past year has been difficult for landlords, many of whom are struggling to get by due to missed rent payments and changes in demand. To help address this concern, there are some COVID-19 tax-relief options that landlords should be aware of:
- Net operating expenses can be carried back 5 years. This means that landlords with a loss in 2020 can deduct it from taxable income going back as early as 2015 for a tax credit.
- Increased business expense deductions. For 2019 and 2020, businesses can deduct 50%, as opposed to 30%, of loan interest from their taxable income.
- Write-offs for Qualified Capital Improvements.Rather than having to depreciate all capital improvements, businesses will be able to deduct some capital improvements immediately.
- Refunds on Corporate Alternative Minimum Tax (AMT) Credit.Rather than having to wait until the end of 2021, businesses can claim a refund this year on AMT tax payments made in 2020.
Take Advantage of All Deductions
In addition to taking advantage of COVID-19 tax relief, it’s important for landlords to utilize all available deductions to get the most out of their investments. The IRS advises landlords that they may deduct “ordinary and necessary expenses for managing, conserving and maintaining [their] rental property.”
While most landlords think to deduct mortgage interest, property taxes, operating expenses, repairs, maintenance expenses, and insurance, there are some other available deductions that are more-often overlooked. Here are a few to consider:
- Home office: there are a couple of ways to deduct this expense, and the IRS provides detailed guidance about how to calculate this deduction.
- Mileage: the easiest way to deduct this expense is by keeping up with your mileage and using a per-mile rate. For 2020, the standard mileage rate for business use is 57.5 cents per mile.
- Professional Services: if you hire a lawyer or accountant to provide services for your rental properties, you can deduct that expense. Similarly, professional subscriptions and services, for example, an EZLandlordForms.com membership or tax preparation software, is a deductible expense.
- Advertising expenses
- Property management fees
- HOA/condo board maintenance fees
- Collection agency fees
- State and local taxes from rental activity
It’s worth noting, that when looking at deductions, it’s important to distinguish between repairs and improvements, as repairs and improvements are treated differently in the tax code. Repairs are projects that put the property back in the same condition, while improvements are projects that increase the longevity or value of the property.
Compile all Necessary Records and Organize Expenses
A final tip for doing taxes this year is making sure that all expenses and records are organized. One of the biggest challenges at tax time can be gathering all of the right information. To avoid the stress of trying to find receipts at the last minute or, worse, overlooking certain expenses, it’s important to have a system for organizing receipts and expenses.
Additionally, there are some key documents that landlords should compile before sitting down to do taxes. These include lease agreements, any legal documents from the previous year, insurance information, mortgage and loan documents, tax records, property deeds or titles, and any special property permits.
This year tax season is particularly burdensome for landlords that have experienced setbacks and losses over the last year due to COVID-19. Taking advantage of all available COVID-19 tax relief options and all available deductions should help to ensure that landlords get the most out of their investments from Tax Preparation During COVID-19.
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