Tax Season 2022: Guide for Real Estate Investors

When is tax season 2022 and how should real estate investors prepare for it?

Taxes are some of the key principles of real estate investments. While there are many tax benefits to derive from your real estate business, you also don’t want to get into bad books with the taxman.

Watch our video below for a quick guide on everything you need to know about real estate taxes:

We’re in that period when auditors, tax preparers, and accounting professionals are quite busy as they organize business financial books to beat the 2022 tax season deadline. Though it might be an unpleasant experience for some investors, it’s something you don’t want to miss.

When Is Tax Season 2022?

To start with, income tax season is the period when individual taxpayers in the US prepare their financial statements and reports for the previous year. This is the period when taxpayers are expected to pay their tax returns. 

Typically, taxpayers in the US are expected to file their tax returns between January 1st and April 15th every year. However, if the deadline falls on a public holiday or a weekend, it’s automatically moved to the coming business day. For example, in 2022, Washington DC’s Emancipation Day falls on April 16th. Being a Saturday, the holiday will be observed on the closest weekday in the Capital, which is April 15th. During such holidays, federal offices, including the Internal Revenue Services (IRS), remain closed.

So, when does tax season 2022 start? Due to the reasons explained above, the tax season for this year starts on January 24th. When does tax season end? Taxpayers have until April 18th to file their tax returns for 2021 and also surrender any due taxes. If a taxpayer files their returns after the deadline, they’re charged late penalty fees or interest charges.  

Only residents in Massachusetts and Maine are not subject to the tax season 2022 deadline. This is because April 18th is Patriots’ Day in these two states. As such, residents here have until April 19th to file their returns.

Key Dates to Note

Here is an outline of key dates and deadlines to remember for tax season 2022:

• The IRS starts accepting 2021 tax returns on January 24, 2022
• The deadline for filing your 2021 tax returns is April 18th. Taxpayers may request a six-month extension, but have to pay owed taxes to avoid interest charges and penalty fees.
• Residents living in Maine and Massachusetts have until April 19th to submit their tax returns.
• If you’re granted a six-month extension, you have until October 17th to file your tax returns for 2021

Pay attention to these dates since the last thing you want to do is accrue more interest and penalties than the total owed tax returns.

What Does Tax Season Mean for Real Estate Investors?

While we can go on and on about facts surrounding the tax season, what’s most important is what it has for real estate investors and how they should deal with it. As you might already know, real estate investing offers investors many tax benefits, especially when the investor directly owns the property.

For example, real estate investors can deduct the value of their mortgage interest plus some costs associated with renting out the property, such as repairs and maintenance. 

With that said, how can real estate investors benefit from tax season 2022?

Related: How to Lower Property Taxes—10 Tips and Tricks

Mortgage Loan Interest Deduction

As we’ve mentioned, property owners can deduct the value of their mortgage’s interest when filing tax returns. The amount of loan payments made annually is deducted from the amount of annual rental property income to arrive at the investor’s taxable income.

When combined with other real estate tax deductions, mortgage loan interest can help minimize the taxation of cash distribution for investors. Real estate owners benefit largely from this because it increases their average returns while minimizing the tax burden. 

Depreciation Deduction

Real estate investors can also deduct their property’s depreciation value from their tax returns. This helps property owners recover the costs of income-generating properties. The depreciation deduction and other property cost deductions can help reduce the taxable income. 

1031 Exchanges

IRS Section 1031, also known as the 1031 exchange, states that a property owner can sell their real estate investment and invest the proceeds in a new home while deferring all capital gain taxes. In short, you can defer your taxes by selling your investment property and using the equity obtained from the sale to purchase another home of greater or equal value. This kind of exchange is beneficial for real estate investors.

Capital Gains Taxation

Another benefit for real estate investors in tax season 2022 is how they’re taxed when it comes to capital gains taxes. Real estate equity investment holding periods may last between two and 10 years. The long-term capital gains rate is applied to any earnings obtained from the property sale. 

Currently, the long-term capital gains rate varies from 0 to 20%, depending on your tax bracket. This means that short-term gains are taxed at your normal rental income tax rate. If you’re a high-income earner, this could make a considerable difference to your tax bill.

Related: Your Guide to Short-term Rental Property Tax Deductions

How Real Estate Investors Can Prepare for Tax Season 2022

Now that we’ve understood what tax season is and how you stand to benefit from it, how do you actually get ready for it?

Work With a Team From the Start

Many real estate investors will insist on hiring professional contractors with a great track record to carry out property maintenance and repairs, or a professional cleaning service to clean their property. However, when it comes to filing tax returns, they’ll choose to do it themselves. This poses a great risk since minor mistakes could either cause huge problems. They could also miss out on a great opportunity to write off part of their property tax. This is how many real estate investors end up accruing a lot of fines and penalties.

You can only avoid getting yourself in this situation by working with a professional team from the very beginning. Get a certified public accountant (CPA) trained to offer financial advice. They’ll help your business in a great way during the tax season. 

Another benefit of working with a CPA is that most of them offer other services on top of financial advice. A professional CPA who specializes in real estate will also help you in investment planning, property acquisitions, and other various areas. They also have a great understanding of tax documentation and the deductions you qualify for. 

Again, we insist on ensuring the CPA specializes in real estate. Though there are fees involved with working with professionals, the cost is minute compared to the price of regret. You’ll save a lot of money in the long run.

Track Your Expenses

While there are many tax benefits for real estate investors, there’s a caveat: you must have a well-maintained record of expenses. This ensures that you make the most out of the tax deductions. 

Track every business expense and update your records throughout the year. Here’s a list of some expenses to track and record:

• Property repair expenses
• Property maintenance costs, such as lawn care, security, pest control, painting, and snow removal
• Capital expenditure, such as major renovations on rental property
• Cleaning fees
• Interest paid on the mortgage
• Marketing fees associated with finding tenants, including costs paid to real estate brokers and apartment finders
• Real estate taxes
• Insurance premiums
• Legal fees
• Property management fees
• Closing costs, such as title company fees and lender fees
• Vehicle expenses

This process may seem insignificant to many investors. However, a well-kept and up-to-date record of expenses could make a huge difference during the tax season. To achieve this, consider implementing one of the top long term rental and Airbnb accounting software solutions available on the market. Other than helping you not miss out on valuable tax deductions, keeping records of your expenses can help you save on fees associated with accounting. Most professional CPAs charge less for investors who have an organized record.

Doing all this work, especially if you have multiple properties, may seem like an uphill task. This is why you should use Mashvisor’s Rental Property Calculator. This tool helps you calculate and track property costs associated with both traditional and short-term rental property.

Even better, you can use this tool even before you purchase your investment property and find tenants. The investment property calculator uses predictive analytics to help you estimate the expected rental income and property expenses. This information would come in handy during tax season 2022.

Organize Your Documents

Before filing your tax returns, your accountant and the IRS will need you to submit a few documents for verification. The documents include:

• Form 1098 to show how much mortgage loan interest you paid
• Form 1099 to report the income you made as a real estate investor; you’ll also need Form 1099-B to report capital gains or losses
• Escrow payment documents to show the amounts you paid for property insurance and taxes
• Insurance statements from your insurer (optional if you’ve provided escrow payments documents for property insurance)
• Home office square footage
• Capital improvements schedule
• Statements for any subcontracted work

If you’re in a real estate investment partnership, the company should also provide you with Form K-1, which shows the investment results based on your share in the partnership. This form also often comes with additional information that will prepare you for proper tax filing.

Digitize

When people think of filing tax returns, they imagine investors scrambling through mixed-up paper files and receipts. This doesn’t have to be the case. Organize your paperwork by going digital. 

Many real estate investors mainly get caught up with what they are doing, whether it’s wholesaling or flipping houses. At the end of the year, they realize they’ve made so much money and owe so much money as well. You don’t want this to happen to you.

Luckily, there are many online tools that help business owners with bookkeeping. Some common examples include Quickbooks, Evernote, and Mint. These software solutions allow you to arrange your expenses into categories. 

Digitizing your documentation process will save you a lot of time and money, and also give you peace of mind during the tax season.

File Early

Many real estate investors wait until the tax season deadline to file their returns. However, there’s no reason to put it off until the last minute. There are various reasons why filing your returns early makes sense. The IRS itself encourages individuals and businesses to start filing their returns as early as possible.

Starting your tax filing process early gives you ample time to collect and organize enough evidence to claim tax deductions. You’ll steer clear of the stress of having to spend sleepless nights doing calculations and organizing receipts. 

Starting early also allows your accountant to have a flexible schedule. It gives them an option to start working on your business accounts immediately. 

File Online

We live in a digital world and it’s only right that you embrace the convenience that comes with being able to do everything from your screen. The IRS has admitted to experiencing delays with the review and processing procedure of returns filed on paper. On the flipside, returns filed electronically are getting reviewed and processed much faster. 

Be prepared to also pay your balance or owed taxes electronically, and also receive refunds in the same manner. Just like filing, the process of making payments manually is also delayed.

On top of that, the IRS has a low staff count, which makes it difficult to reach their customer service on the phone. This makes it even harder to have issues, such as late payments, ironed out. 

Prepare for the Next Tax Season

Once you’ve had a smooth tax season in 2022, remember it’s not game over yet. Talk to your accountant and ask them about how you can prepare for the next tax season and take advantage of tax deductions. Make a strategic plan for the next year and follow it through.

Learn More: Learn How to Do Taxes on an Investment Property

Key Takeaways

We’ve looked at enough tips to ensure you have a smooth tax season 2022. While working with a CPA can do a lot for you, don’t just sit back and let them do all the work. Research and educate yourself more on the topic. Read real estate blogs, listen to podcasts, and watch educational videos. This way, you’ll stay updated and on top of your functions. 

Luckily, Mashvisor is a one-stop-shop for modern-day investors. Here, you’ll find a lot of valuable information to help you through your real estate journey, as well as a myriad of investment tools. Book your demo today to learn more about our tools.