Tax time double-check: easily missed deductions
This article highlights easily missed deductions that can make a big difference to your tax liability. The majority of our list focuses on deductible expenses that won't show up as a payment from your bank account.
If you have a separate bank account for your rental property expenses that you have linked or uploaded transactions and have booked all those transactions, you are likely to have accounted for all of your deductible expenses or capital expenditures. But the
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1) Did you book all rental related transactions in the tax year?
This seems obvious, but it can be surprisingly easy to forget to enter an expense and therefore, pay too much in taxes. Booking all of your rental related transactions will result in an accurate accounting of your revenues and expenses for that year. This is easy if you have a dedicated rental bank account for all related transactions, and easiest if that account is linked to your accounting software!
Don't forget to enter in any additional transactions you may have paid out of pocket or from a different bank account. Overall, make sure you have entered all your revenues (rent, fees, etc), operating expenses (your Schedule E expenses) and other expenditures (capital expenditures/ fixed assets).
2) Did you (or will your tax preparer) enter depreciation deductions?
Depreciation is the mechanism through which investors recover the costs of buying and improving rental properties. Depreciation is a tax deduction and not a directly incurred expense; you won’t see it come across your bank feed.
Every owned investment property (that hasn’t already been fully depreciated) should have a depreciation entry for every tax year. Other fixed assets, such as large improvement projects, should also be depreciated. Different kinds of fixed assets have different useful lifetimes, and are therefore depreciated on different timelines.
In REI Hub, you can enter in depreciation on either a per-asset basis or on an uncategorized basis. If you are tracking your fixed assets in REI Hub, enter depreciation per asset. If your tax preparer is managing depreciation on your behalf, you can add a general entry (based on their calculations) for your entire portfolio.
It is essential that depreciation deductions are entered on your taxes. Tracking it in REI Hub is optional, but highly recommended. Regardless, you and your tax preparer should be on the same page about who is responsible for calculating annual depreciation and maintaining records.
3) Did you book any miles driven to manage or maintain your properties?
The IRS allows rental property owners to deduct miles driven in the process of maintaining or managing their properties. Because this is an operational tax deduction without a direct expense hitting your bank account, it is an easy omission for many investors.
To get credit for your deductible miles driven, add trips to the Mileage Log in REI Hub (under Organization). The required fields match the information the IRS asks for.
Mileage deductions will be rolled up into the Auto & Travel expense category of the Schedule E. However, they will not display on the Net Income, as they are not a directly incurred expense.
4) Investors with escrowed mortgages: did you enter property tax and property insurance expenses?
Some mortgages include an escrow component where you pay the mortgage servicer extra every month, and then they pay property tax and insurance out of that escrow account.
The escrow component of your mortgage payment is a transfer, not a direct expense. The IRS requires you to report your actual expenses, not your estimated expenses. Therefore, you can't just report the escrow transfers as property tax or insurance expenses, and instead must enter the actual expenses.
Since these expenses are paid out of your escrow account on your behalf, you will not have an imported transaction from your operating bank account to cue you to book these expenses. So if you have an escrowed mortgage, don't forget to book those annual property tax and property insurance expenses!
Use the REI Hub Tax Review to double check your books for these easily missed deductions. We hope this double check helps rental property investors claim the most deductions possible!
For any questions about your rental property bookkeeping with REI Hub, please contact us.