If you are like most people, you probably don’t want to remember the year 2020. Since the outbreak of the Coronavirus
pandemic, business has been a nightmare for those involved in real estate investing. However, as much as you would want to put the last year behind you, there is still one small matter you need to take care of: filing your 2020 returns within the tax season.
When Is Tax Season?
In other words: “When are taxes due in the US?“
Tax filing season is the time period between January 1st and April 15th of each year. It is the time when individual taxpayers prepare financial reports and statements for the previous year and surrender their tax returns. In the US, individuals are usually required to file their tax return by April 15th at the latest. However, if the tax filing deadline falls on a holiday or a weekend, it is automatically moved to the next business day. Any returns submitted after the tax filing season are subject to interest charges and late penalty fees.
Thanks to COVID-19 and the effects thereafter, a lot has changed for the 2021 tax season. Let us answer two common questions being asked by real estate investors:
- Will the coronavirus stimulus package be taxed? – In March 2020, the US government passed the CARES Act in an effort to offer assistance to the average American affected by the Coronavirus pandemic. The government sent a Coronavirus stimulus package of up to $1,200 to millions of Americans when most of the country shut down. Later in the year, some people received a second economic impact (stimulus) payment in form of an IRS stimulus check. The good news is that the IRS stimulus payments are not considered taxable income.
Related: How the CARES Act 2020 Will Impact Real Estate
- If I took a PPP loan, will it affect my taxes? – The CARES Act was not designed to just help families and individuals; it also attempted to offer some financial relief to struggling small business owners – including some owners of investment properties – through Paycheck Protection Program (PPP) loans. Such loans will not be taxed… as long as they were used for specific business expenses, including utilities, interest on mortgage payments, rent, or payroll.
How to Prepare for Tax Season 2021
Here are some things you need to do in preparation for tax season 2021:
Track Your Expenses
One of the major real estate tax benefits is that many legitimate expenses are tax-deductible. Here are some traditional and Airbnb tax deductions that will help lower property taxes:
- Repair costs
- Maintenance costs including pest control, snow removal, lawn care, building security, and painting
- Capital expenditure (major renovations on the income property)
- Cleaning fees (for Airbnb rentals)
- Marketing costs to find ideal tenants, including fees paid to apartment finders and real estate brokers
- Interest paid on mortgages
- Insurance premiums
- Property taxes
- Office expenses related to the management of the rental property
- Fees paid to a professional property manager
- Legal fees
- Closing costs such as lender fees and title company fees
- Tools, software, and other real estate support expenses
- Lodging and travel expenses incurred when visiting a remote rental property
- Depreciation
- Costs related to education, such as attending courses and conferences
- 20% pass-through deduction (based on the Tax Cuts and Jobs Act of 2017)
Related: How to Estimate Rental Property Expenses Before Buying
Do your due diligence to find out exactly what deductions you are eligible for as a smart real estate investor. It would be advisable to consult an accountant for clarifications in any gray areas.
In addition, you need to use a rental property calculator to manage all your deductible expenses. Mashvisor’s investment property calculator will help you calculate the different costs associated with a traditional or Airbnb rental. Even if the home is not rented yet, this real estate investment software will use predictive analytics to estimate the anticipated expenses and rental income. This information could come in very handy during tax season 2021.
Gather All Your Documents
Your accountant and the IRS will require you to submit supporting documentation to verify all the numbers. These are some of the documents required:
- 1098 mortgage interest statements
- Closing statements for any sales, purchases, and refinance of investment properties
- Insurance statements from your insurer and property tax payments or
- Escrow statements showing actual amounts paid for insurance and property taxes
- Schedule of capital improvements
- Home office square footage
- Statements for any subcontracted work
- Form 1099-B for reporting capital losses and gains
For real estate investment partnerships, the company should provide you with a Form K-1. This document will show the investment results according to your share in the partnership. Quite often, the form will also come with additional information that you require for proper tax preparation.
Related: Civil Code 1101.3: What Investors Should Know
Understand Your Filing Dates
As mentioned earlier, missing the deadline for filing your tax return will cost you. If you default, the IRS will keep charging you interest on the amount owed until it’s fully paid. While individual investors are required to file by April 15th, partnerships must file by March 15th. Your accountant will require all the documentation several weeks ahead of the tax day 2021. This will give him/her time to ask questions and request any additional information.
Conclusion
With the above-mentioned real estate tax tips, tax season 2021 should not be a frustrating time for real estate investors. To make your work even easier, work with a certified public accountant (CPA) who specializes is real estate. The fees you will pay a CPA are nothing compared to what you will save when you file taxes correctly.
However, don’t just rely on your CPA for information. Stay updated by reading real estate blogs, listening to real estate podcasts, and watching videos that are free and on-demand. Subscribe to relevant newsletters, attend in-person training sessions, and join investment clubs.
Finally, remember to use Mashvisor’s investment property calculator that comes with pre-set property tax calculations which are adjustable.
Do you have questions about Mashvisor? Read our FAQs and learn about our tools.