If you want to keep your rental property running without a hitch, you need to pay your bills, especially your taxes. Unlike other payments like utilities and repairs, navigating your tax responsibilities can feel convoluted if you don’t understand how deductible expenses and depreciation claims work. With the support of property management in Baltimore, landlords can develop tax strategies, such as renovations, that may help with deductions. That’s why we’ve put together this article to help you manage your landlord tax responsibilities better.
What are Property Taxes?
For starters, we need to clarify what property taxes are before diving into how you can manage them. They are taxes the local government imposes on real estate to help fund public services like schools, road maintenance, and essential services like hospitals and fire departments. As a result, your local government will calculate the amount you’re to pay based on your property’s value, and landlords are expected to pay this fee annually or semi-annually.
Factors that Influence Property Tax
Property Value
In most instances, the primary driver of your total tax payable is your property’s market value. For example, the owner of a three-bedroom single-family unit in a high-end neighborhood can expect to pay more than the landlord of a studio apartment in a middle-income area. Besides the size and neighborhood, proximity to amenities like good schools and public transportation can also add a cap on your taxable income. Take note that anything that drives your home’s market value up will lead to higher taxes.
Local Tax Rate
Another factor that influences how much tax you have to pay is the local tax rate. Owners of comparable properties may pay different amounts in taxes depending on their local governments. If you own a house in an area that’s dependent on real estate taxes to keep the community running, then you’ll most likely have to pay more. On the flip side, counties with more diversified income streams are less likely to burden homeowners with excessive taxes. That’s why it’s essential to take note of the locations that don’t have property tax when deciding where to invest.
Potential Tax Saving Opportunities
- Depreciation
Reduce your taxable income by legally deducting a portion of the home’s value from your taxes each year. But how does that work when one of the benefits of investing in real estate is that properties appreciate over time? Well, technically, the land does. In reality, buildings lose their value as fittings and crucial systems become outdated and need replacement. As a result, the IRS lets property owners reclaim a portion of the property’s value, excluding the land, as an expense each year.
- Management Expenses
Keeping a rental operational requires considerable expenditure. For example, when your HVAC system breaks down or a pipe needs replacement, you have to call in the experts to fix it. Even routine inspections cost money, hence, you’re allowed to deduct your repair and maintenance fees. Besides that, management also costs money through travel costs to meet tenants and make repairs, paying wages to your staff, and utilities to keep the lights on. These ordinary yet necessary rental business-related costs are also tax-deductible, giving you a much-needed break if you can make the most of it.
Common Property Tax Mistakes
Ignoring Reassessment Notice
If you’re looking to cut down your taxable income, don’t miss any opportunity to reassess your property value with the local tax assessor’s office. It’s common for landlords to ignore this notice because they feel the difference is negligible, but it also means missing the limited window to appeal for lower taxes. During the reassessment phase, you have the opportunity to learn how your tax value is calculated and spot any inaccuracies that could be causing you to pay higher taxes. That gives you a limited window to fix the mistake and pay less in taxes in the long run.
Overlooking Deductions
Leverage every possible tax break at your disposal to cut back on your total expenses. If you don’t use every legitimate deduction available to you, it’s as good as leaving money on the table and reduces your potential rental income. That’s why it’s essential to keep meticulous records of all your property-related expenses throughout the year so you can claim what qualifies down the line. For instance, you could decide to install solar panels in your rental to reduce your utility bill in January and realize in March that the county offers tax breaks for properties using clean energy. With the receipts of your power usage from January, you can claim all possible tax credits on your next return.
Failing to Account for Tax Increases
Stay updated on local tax laws and infrastructure development around you that could influence your property value. It’s not uncommon for tax rates to change due to new infrastructure and policies, which ultimately affect your bottom line. Thus, it’s essential to budget for tax increases to avoid disrupting your cash flow through increased expenses that wipe out your income.
Importance of Proactive Tax Planning
- Maximize Profitability
Get the most out of your rental property by cutting back your taxable income. With the right strategy, you can identify what deductions you qualify for and apply them to claim your next return. It may seem like drops in a bucket, but by the time you cut a thousand here and a few hundred dollars there, it could add up to increase your overall profit.
- Avoid Penalties
If you don’t care about saving money, it’s essential to be proactive with your tax planning to avoid losing it. Failing to meet your tax obligations is a serious offense, even when it’s a mistake. Thus, understanding your local taxation policy so you can fill out your Schedule E form correctly can help you avoid costly fines and penalties.
Conclusion
Managing your property effectively means handling your taxes. As a result, you need to understand how your taxes are determined and what deductions you can claim. In most instances, market value and local tax rates play a significant role in determining your total property tax. However, you can save money by claiming depreciation and day-to-day management and maintenance expenses. Of course, these costs go up, so remember to account for tax increases and use the reassessment window to ensure you’re not paying more than you need to. In the long run, proactive planning puts more money in your pocket and helps you avoid tax-related fines.
Also Read: Comparing Old vs. New Income Tax Slab System: Which One Offers the Best Advantage
