Are you looking for a way to diversify your investments? If so, you might be thinking about purchasing a rental property. Even though you should certainly diversify your investments among stocks, bonds, and mutual funds, it is just as important for you to diversify outside of the traditional market as well. That is why you might be thinking about purchasing a rental property.
Even though owning a rental property can be expensive, there are opportunities for you to save money. Take a look at some of the most important accounting strategies you need to follow if you want to save money on your rental portfolio.
1. Have a Separate Bank Account
One of the most common mistakes people make when they are running a rental property is that they believe they can simply handle all of their rental’s financial needs using their personal bank account. It is important for you to keep the money you use for all other expenses separate from the money you use for your rental property. At the end of the year, you will need to tabulate the income you generate from the rental company and the money you have spent on the rental property. It will be much easier for you to calculate these numbers accurately if you have everything in a separate account.
2. Keep Improvements and Repairs Separate
When you spend money on your rental property, you may assume that everything is tax-deductible. It is true that a lot of the money you spend on your rental property will be tax-deductible; however, these deductions are claimed in different ways.
For example, if you have a repair you need to complete, such as a leak in the roof, the amount of money you spend repairing the roof can be deducted from your taxes. On the other hand, if you spend money on a home improvement, such as investing in an energy-efficient upgrade, this money is not necessarily tax-deductible. Instead, you are going to claim these as capital improvements, and you will depreciate them over time.
If you are curious about what qualifies as a home improvement versus what qualifies as a home repair, you need to reach out to a professional who can help you. That way, you claim all of your deductions appropriately.
3. Claim the Depreciation of the Property
It is true that you are investing in real estate because the value of real estate generally goes up over time; however, your property will experience a significant amount of wear and tear. You are allowed to deduct the value of your property’s depreciation from your taxes. At the same time, you need to make sure you calculate this appropriately.
Even though you may think you can track this number on your own, it is generally better to hire an accountant to help you. That way, you make sure you calculate this value appropriately, you claim all the money to which you are entitled, but you do not open yourself up to an audit from the IRS.
4. Track Your Loan Payments
If you own a personal home, the money you put toward your mortgage is generally not tax-deductible; however, you can deduct the interest on your mortgage from your taxes. The same is true if you own a rental property. You need to track your loan payments closely because the interest on that mortgage is generally tax-deductible.
You do not necessarily need to tabulate this on your own, but it is important for you to keep track of it anyway. At the end of the year, the bank should give you a statement that lists out all of the money you have spent on mortgage interest during the calendar year. Then, you should be able to claim this as a deduction on your taxes.
Keep in mind that if you take out a home equity line of credit, usually known as a HELOC, you should be able to deduct the interest on your HELOC from your taxes as well. You are only allowed to deduct the interest on your HELOC if you put the money toward your rental property, so make sure you track this information closely.
5. Do You Have a Property Management Company?
You may feel like you don’t have time to manage your rental property on your own. If that is the case, you may want to hire a property management company to do it for you. The fees you pay to a property management company are generally tax-deductible.
There are a lot of reasons why you might want to hire a property management company. For example, you might not live in the local area, which means it is difficult for you to respond to the requests of your renters quickly. Or, you may have a day job, which means that you don’t necessarily have time to deal with it on your own. Even though hiring a property management company can be expensive, keep in mind that the money you pay them is generally tax deductible.
6. Track Your Marketing Expenses as Well
One of the most common expenses that a lot of property owners overlook is marketing. You may find that it is difficult for you to find someone who is interested in renting your property. In that case, you need to get your name out there, and that means doing some marketing. There are plenty of online services that will market your property for you, but you will have to pay a fee. This is considered a business expense, so you should be able to deduct the cost of advertising your rental property from your taxes. If you use a service throughout the entire year, they should provide you with a statement at the end of the year that will let you know how much money you have spent.
Contact Hard Money Lenders AZ for Help With Your Rental Needs
Because there are so many expenses that you need to track related to your rental property, it may be beneficial to hire an accountant who can help you. An accountant can make sure you do not overlook anything, and they might be able to identify other deductions you can claim as well. Keep in mind that the money you pay your accountant should be considered a business expense. Therefore, you should be able to deduct this money from your taxes as well. If you are looking for someone who can help you find financing for a rental property, look no further than Hard Money Lenders AZ. Contact us today to learn more about how we can help you!
