As a landlord of a residential property, tax laws overwhelm you, and it may be huge. If you are a landlord, you need to track the rental income and property value to calculate the tax bills and then try to reduce the tax bills.
You cannot completely avoid taxes but can reduce taxes through tax planning. In this article, you will learn about tax planning tips for landlords. Keep reading the article!
1. Determine If You are Active or Passive Landlord
The first important top tax planning tip for landlords is determining whether they are active or passive. Active landlords make critical daily decisions involving recruiting and approving tenants, developing rental terms, and handling property repairs.
You can claim the tax deductions from your rental income if you are an active landlord. On the other hand, if you are a passive landlord, you cannot claim the tax deduction from your rental income. The passive landlord uses management to do much work for their lands.
Thus, there will be a limitation in claiming the taxes when you are a passive landlord. So, whether you are an active or passive landlord matters a lot.
2. Defer Your Capital Gain Tax
The next important tax planning tip is to defer your capital gain taxes. To lower your tax liability, you must develop a plan or get tax planning services to postpone your capital gain tax. When you sell your property and get a profit from this property, the capital gain taxes are applied to this profit.
If you plan to sell your rental property without any increase in tax bills, the 1031 exchange rules will work for it. Furthermore, if you plan to reduce capital gain taxes, you can transfer your empty to your heir, who will not be eligible to pay the capital gain taxes. This way, you can further reduce the amount of the taxes.
3. Lower Your Tax Bills
The next tip is to lower your tax bills by claiming the deductions. Active and passive landlords reduce their tax bills by claiming a tax deduction from their taxable income. For instance, you can deduct advertising costs, property taxes, mortgages, and utilities.
Furthermore, active landlords can claim a further deduction from the day-to-day management of the lands, such as lawn maintenance, repairs, and other travel expenses. Landlords need to remember that the management of the house does not come under the day-to-day management of the land, so that cost will not be deducted from the taxable income.
4. What Falls Under Rental Income
Finally, one of the effective tax planning tips is to know what falls under your rental income. You need to know that monthly rent payments are not only the source of taxable income. The advance payment, such as the first and last payment of the rent, non-refundable security funds, and other lease cancellation fees, comes under the rental income.
When you identify the source of the rental income, you can easily calculate the tax bills and then follow some rules to prevent your rental income from taxes.