If you are a real estate investor or landlord in Houston, you know how rewarding owning property can be. However, things are not quite as thrilling once tax season rolls around. The paperwork can quickly accumulate between rental income, depreciation, repairs, and deductions.
So, how do you ensure you’re filing your taxes correctly?
Knowing the tax process to safeguard your investment, whether you have a single rental property or multiple investment properties. In this guide, you’ll learn the basics of tax filing on investment properties and why having professional property owner tax services in Houston, Texas, can make all the difference.
Start With Good Recordkeeping
The secret to getting taxes right starts long before April. Keeping good records during the year is crucial. You need to monitor:
- Rental income (including security deposits when they’re not returned)
- Maintenance and repair expenses
- Mortgage interest
- Property taxes
- Utilities (if you paid them)
- Insurance premiums
- HOA fees
- Depreciation records
These facts help your CPA report income correctly and claim maximum deductions. Most Houston investment property tax preparation services suggest using property management software or electronic spreadsheets to remain well-organized throughout the year.
Know Your Taxable Income
Your taxable income for investment properties is not simply rent collected minus mortgage. Gross rental income minus deductible expenses determines taxable income.
For example, if you collect $2,000 monthly rent but pay $700 for deductible expenses (mortgage payments, upkeep, etc.), your taxable income is $1,300 monthly.
In addition, you can deduct depreciation yearly, which reduces your taxable income even further, though it’s technically a “paper loss.” This can lead to more significant savings for property owners in Houston, Texas, using tax services.
Know What You Can (and Can’t) Deduct
Real estate investors lose out on deductions because they don’t know what’s deductible. Here are some of the most commonly deductible expenses:
- Advertising expenses to find tenants
- Legal and accounting expenses
- Property management expenses
- Repairs and maintenance (ordinary and routine)
- Traveling expenses (if it’s related to managing your property)
- Office expenses (if you work from home)
However, significant repairs such as a new roof or a kitchen renovation usually need to be capitalized and depreciated over several years instead of fully deductible for the year.
A Houston investment property tax preparation professional can guide you through these subtleties and make sure you don’t leave any money behind.
Take Advantage of Depreciation
Depreciation is the most significant tax benefit of investment property ownership. The IRS permits you to depreciate the value of your rental property (excluding land) over 27.5 years. That means part of the value of your property can be deducted annually, regardless of whether its value increases.
But here’s the catch: depreciation becomes tricky when you sell. You might need to “recapture” some of that depreciation and pay tax on it.
That’s why investors hire CPAs specializing in real estate tax preparation in Houston, TX, to ensure they get the right amount and know the long-term effect.
Report Everything on the Right Forms
You’ll report your income and deductions on Schedule E of your tax return for most rental homes. If you’ve got the property through a corporation, LLC, or partnership, you’ll file a separate business tax return and distribute K-1 forms to each member.
Filing the wrong form or inaccurate reporting can trigger audits, penalties, and unwarranted pain.
That’s why it makes sense to hire a team that provides professional tax services for property owners in Houston, Texas. Trust them to know how to categorize and report everything according to IRS regulations.
Be Strategic with Passive Activity Losses
Real estate rental income counts as passive income, including any losses, with certain limits. Typically, you can deduct as much as $25,000 in passive losses if your income falls below $100,000. Over that, the deduction phases out.
But you could deduct more if you’re a real estate professional or substantially participate in your rental business.
A Houston, TX CPA experienced in real estate tax preparation can assist you in determining your status and making the most of your deductions.
Get Help for Quarterly Estimated Payments
If rental income is a large portion of your income, you might be required to make quarterly estimated tax payments. If you don’t, you might end up paying penalties and interest.
Your accountant will assist you with:
- Estimating tax payments
- Create a tax calendar
- Don’t get an unpleasant surprise come April
Some Houston investment property tax preparation services offer proactive planning throughout the year, so you’re ahead.
Collaborate with a Local Expert Who Understands Houston Real Estate
Not every tax professional is equal. If you are an investor in Houston, it is beneficial to work with someone familiar with the local real estate market, rental patterns, tax policies, and investor pain points.
A local tax expert in Houston, TX, who provides services for property investors, can offer tailored advice, highlight industry-related deductions, and assist you in organizing your investments in a tax-effective manner.
Final Thoughts
Investment property tax filing can be difficult, but with the proper knowledge and guidance, it’s doable and good for your bottom line.
From discovering deductions to filing the correct forms, knowing depreciation, and looking ahead, the best thing you can do is have a professional do it for you. A CPA who provides tax preparation for investment properties in Houston or realtor tax preparation in Houston, TX, can save you time, money, and a lot of stress.
