Property Management Blog

What Oregon Landlords Need to Know About Year-End Taxes

What Oregon Landlords Need to Know About Year-End Taxes - Article Banner

We are always talking about the many benefits that come with professional property management in Portland. One of those benefits, which is often overlooked, is the fact that you can count on expert accounting and bookkeeping for your investment, whether it’s a single property or an entire portfolio. 

Carefully tracking the income and expenses associated with your investment is one of the things your property manager will do for you, and you’ll enjoy the accuracy, transparency, and detail that come with expert property management software and innovative technology. We can provide routine financial reports and accounting statements that reflect where you are financially, and this will almost always lead to a better investment experience

There’s also tax time to think about. 

Whether you’re working with a property manager or taking care of your accounting and management yourself, it’s essential to be organized when you approach your year-end taxes. Most real estate investors have a CPA or a tax accountant who helps them file their taxes, and your property manager can also be of assistance by providing accurate documentation that supports what you’re claiming as income and losses. 

Always make sure you’re taking all of your potential tax write-offs. In this blog, we’re talking about some of the most important tax benefits real estate investors can earn, and we’re helping you prepare for those inevitable tax questions and potential problems that may come up. 

Real estate investments can help reduce your tax liability, even as you increase your income. 

Let’s take a look at what we mean. 

Declaring Income on Year-End Taxes 

The income you earn in rent will have to be included on your tax forms. You’ll file the full amount that you collected over the year. So, let’s say you’re only renting out one property and it earns $1,800 a month in rent. That’s $21,600 per year. Maybe you own a small apartment building and all five units bring in a total of $8,500 per month. That’s an annual income of $102,000.

Claim this income. It may bump you into a higher tax rate, but don’t worry; when we include all of the business deductions that you can also claim, your tax exposure will be greatly reduced. 

Depreciation as a Tax Benefit for Portland Rental Homes

A major tax benefit for rental property owners is depreciation, and your year-end taxes should always reflect the depreciation deduction that you’re eligible to take on your Portland investment property. 

The IRS allows you to write off the deterioration of your rental property, which leads to a loss of value. The general rate of depreciation is set by the IRS at 27.5 years. That’s not an inconsequential amount of time, and the tax code allows you to accelerate the depreciation loss with your rental property. Most investors use this to offset their tax liability.

This tax benefit only applies to the physical property. It does not pertain to any land. So, if you have a Portland rental property for which you paid $350,000, the land the home is on is appraised for $50,000, and the house itself is worth $300,000, the depreciation you deduct can only be on the $300,000 amount.

Talk to your CPA or your tax accountant for clarity. But generally, you’ll declare the rental property depreciation on Schedule E of a standard 1040. If you claim depreciation on a property in the year you began using it as a rental, you’ll use Form 4562. We’re property management experts but consult with your tax expert, too. 

You cannot claim depreciation unless you meet the following requirements: 

  • The property must be owned by you.

  • The property must earn rental income.

  • You must be able to document the useful life of your property. This will depend on the type of rental investment you own. Everything has a different life cycle or rate at which it wears down. For real estate, this is somewhat standardized and the 27.5 years applies, unless your property is subject to the Alternative Depreciation System, in which case it’s 30 or 40 years (this is rare).

  • The useful life of the property must be greater than 1 year. Nothing that wears out in less than a year can be depreciated on your taxes.

If you begin renting out a home in one year and sell it within that same year, you cannot claim depreciation on that property. 

Business Expenses Associated with Your Portland Rental Property 

As a real estate investor, you need to treat your rental property as a business. Whether you have one rental home or an entire portfolio, the IRS sees your rentals as a business that earns income. That means many of the expenses you incur as a business owner are tax-deductible. There are a few things you should always take advantage of when you’re claiming tax benefits. 

Here are some of the most common tax benefits you’ll be able to claim when you’re filing your taxes at the end of the year: 

  • Writing Off Maintenance and Operating Expenses 

Most of the costs associated with maintaining your rental property can be deducted from your taxes. This includes repair costs and any materials that you need to keep your property in operable condition, such as paint, drywall, smoke detector batteries, air filters, and other supplies. 

Keep in mind that there is a difference between maintaining and improving your rental property. The maintenance costs are completely tax deductible. The money you spend on improving your home, however, will not be immediately reclaimed by you through tax deductions. You can earn some of that money back through depreciation over the long term, but it’s not a quick and easy write-off like a maintenance bill may be. 

Outside of maintenance and repair costs, other operating expenses are also deductible from your taxes. These expenses may include:

  • Costs of advertising and marketing
  • Commissions to real estate agents 

  • Professional fees for property management, accounting, legal advice, etc. 

  • Landscaping

  • Pest control

  • Insurance premiums

  • Property taxes

As you file, providing documentation to support these deductions is not always going to be required. Make sure you have it easily accessible, however, because in the event that you’re audited, you’ll need to provide proof of what you spent and what you deducted on your year-end taxes.

  • Deducting Mortgage Interest 

Another business expense that you’re permitted to deduct from your year-end taxes is interest. This is most typically going to be the interest you pay on your mortgage. If you have a loan on your rental property, you can deduct the amount you pay in interest every month. 

Other types of interest are also eligible to deduct when you file your taxes. For example, if you use a credit card to make purchases for your rental property, you can deduct the interest you pay on that credit card, as long as you can document the purchases are related to your investment. Maybe you’ll buy a couple of washing machines and dryers for a duplex you own. Or, you’ll stock up on paint that you use for all of your properties during a turnover. The credit card interest you pay is tax deductible.  

If this is a deduction you’ll frequently take, you might find it’s easier to keep a credit card that’s specific to your rental property. Separating business from personal finances will make tax time a lot easier. 

Portland Rental Property Owner Expenses Covering Travel and Home Office

Whether you’re working with a Portland property management company or managing on your own, you are going to find yourself gathering expenses that are associated with your investment. Maybe you’ll travel to see a property that you’ve been renting out for years, or you’ll set up a home office that’s specifically dedicated to the work you do with your rentals. 

Travel expenses can be deducted from your taxes. Airfare and lodging can be written off if you’re an out-of-state investor and you occasionally come to Portland to check on your properties. The criteria you’ll need to meet in order to take this deduction include:

  • There’s a specific purpose for your business travel.

  • Most of your time is spent on business activities.

  • Your expenses are ordinary and necessary (don’t stay in the most expensive hotel)

If you drive to your rental property, you can deduct the standard mileage. Keep track of your itemized expenses and document everything. The IRS may need to see receipts. 

When you use part of your home as an office out of which you conduct rental property business, you’re able to deduct some expenses. There’s generally a standard deduction for home office use when you file. Do you belong to real estate associations, subscribe to newsletters, or pay for conferences and continuing education? Those fees are eligible to be deducted from the income your rental property earns. 

Tax ProfessionalWe always recommend that you work closely with a tax professional when you’re preparing your year-end taxes. We can tell you everything you need to know about the property management part of filing and paying taxes, but a CPA or a professional accountant will be invaluable. 

Questions about your property or your portfolio? Contact us at PropM, Inc. We’re available seven days a week to help.