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Real estate investing

What Investors Need to Know About Property Tax Laws


What Are Property Tax Laws?

Taxes are confusing, politically charged, and seem to change every time someone new comes into power. In the case of property taxes, the IRS regulations surrounding them seem to be endless. However, if property investors don’t follow these laws, they can face severe consequences from the federal government.

A property investor must report any income they receive relating to their properties on their tax returns. To do so, the investor must know what types of income he or she must report and what deductions he or she is able to take away.

Income Reporting

Property investors must report any income they have received during the fiscal year from their properties on an IRS tax return. This income includes:

  • Rent
  • Expense reimbursements
  • Insurance payouts

Bonds Property investors must save documentation to prove this income, including receipts, invoices, and bank account deposits. The higher the income, the higher amount of taxes an investor must pay. Claiming property expenses as deductions can help bring these tax costs down.

What Are Deductions?

Before investors report their income to the IRS, they need to know the deductions for which they are eligible. These property deductions must include documentation that proves the investor spent this money on the property and not for other purposes. It is a crime to claiming ineligible or false deductibles to bring tax costs down.

Luckily, property investors can deduct nearly all their property expenses on their tax returns. Common deductibles a property investor can claim include:

  • Mortgage interest
  • Property management costs
  • Mileage used to drive to and from properties
  • Professional services, such as a lawyer, accountant, or on-site property manager
  • Depreciation
  • Property damage from a tenant

If a property investor lives in one of his or her properties or works from home, he or she can claim expenses such as utilities, internet connection, electricity, and other operation necessities as deductions. It’s important for investors to keep track of all their income sources, expenses, and business operations. Sometimes investors will discover the most unexpected costs they can claim as deductions, reducing the income on which they must pay taxes.

Not all expenses are eligible for deductions. A property investor may not claim the following expenses as deductibles:

  • Costs incurred prior to owning the property, such as environmental assessments and extermination services
  • Damages incurred prior to owning the property, such as plumbing repairs or window replacement

Changing Policies

Property tax laws are subject to federal government policies. Tax laws often change when different political parties come into power. Theoretically, property tax laws in 2018 can look quite different in 2022. For this reason, it is vital for property investors to stay informed on politics and changing tax policies.

Hire a Professional

Tax laws are complicated and breaking these laws, intentional or not, can result in severe fines or even jail time. Savvy property investors enlist the help of a certified accountant or financial professional to help them prepare for tax season.

Looking for simple ways to organize your property investments before tax season? Contact Home365 today to learn more about our portfolio management software and to schedule a free demo.

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