Maximizing Profits: Top Tax Planning Tips for Landlords

As a landlord of a residential property, navigating tax laws can feel overwhelming. Landlords often need to track property value, understand what falls under rental income, and develop a plan for lowering tax liability. If you’re trying to save money on rental taxes, consider these four tips to stay ahead of the game.

1. Understand What Falls Under Rental Income

Monthly rent payments aren’t the only source of taxable income you can receive as a landlord. In fact, advance payments such as first and last month’s rent, non-refundable security deposits, and lease cancellation fees also fall under rental income.

Further, if you obtain income from renting out parking spaces, conference rooms, storage units, or equipment to tenants, the money you receive is also part of your rental income. Start by identifying all sources of rental income so you can accurately calculate your tax bill. 

2. Determine If You’re an Active or Passive Landlord

Landlords can be either actively or passively involved in managing their properties. Active landlords make critical day-to-day decisions such as recruiting and approving tenants, developing rental terms, and handling property repairs. If you’re an active landlord, you can claim a long list of deductions on your rental income, including property depreciation. These deductions help offset the time and effort spent managing the property.

On the other hand, passive landlords often use a real estate management service to do most of the work. While you still make important decisions and receive rental income as a passive landlord, there are limitations to the types of deductions you can claim. For example, you can’t use losses on the property to offset your other income sources. You can only offset losses on passive rental properties by using passive income.

3. Lower Your Tax Bill by Claiming Deductions

Active and passive landlords can deduct various expenses to reduce their taxable income. For example, you can deduct advertising costs, insurance premiums, mortgage interest payments, utilities, property taxes, and depreciation. Active landlords can further deduct day-to-day management costs such as repairs, lawn care, and travel expenses related to the property.

Landlords should remember that home improvement costs fall under depreciation expenses and are not day-to-day management costs. While depreciation is a type of tax deduction, you would typically spread the depreciation cost over the life of your property.

4. Defer Your Capital Gains Tax

To lower your tax liability, consider developing a plan to defer your capital gains tax. Capital gains taxes apply to the profit made when you sell a property. During the sale, the expenses you claimed as depreciation are essentially reapplied and taxed at the ordinary rate. You will also pay the regular capital gains tax rate, which ranges between 0% and 20%.

If you’re planning to sell a rental property without increasing your tax bill, a 1031 exchange could help you defer capital gains tax. How does it work? Rather than paying capital gains tax upfront, you can redirect that money to another rental property of equal or greater value. And if you’re planning to pass your property to an heir, the heir will not be liable for any outstanding capital gains tax.

While renting out properties can be highly profitable, developing a tax plan as a landlord can be challenging. At Golden Tax Relief, we work with high-income businesses and individuals to help them reduce their tax liabilities while complying with current tax laws.

We also help you develop a long-term strategy to gain the most value from your investments. Rather than being stuck with a high tax bill, contact us to create a tax plan that lowers your liability today.