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Tax Preparation For Property Owners

BY THOMAS E. MASSON II, ESQ.

As we turn the page on yet another year, watching the fireworks and celebrating with family and friends, there might be a few at the celebrations turning their thoughts to filing their taxes – well maybe not on New Year’s Eve, but definitely early on in January. Each year presents opportunities for new acquisitions as well as making capital improvements and conducting regular maintenance on current real estate holdings, all with an eye on maximizing cash flow and increasing value while minimizing taxes. Proper tax planning begins with being properly informed. I hope that what follows will serve as a guide for property owners in their tax preparation. Please note that each owner's specific circumstances are unique – I highly recommend consultation with a tax professional on how best to file your tax returns.

For property owners, the tax journey begins at acquisition. This includes keeping a copy of your closing statement and title insurance policy readily accessible. These documents will form the foundation for all future tax considerations, as the purchase price establishes your basis in real property. It is also important to have the costs and expenses of acquisition, including those associated with any financing, available for future planning and tax purposes. Keeping good records for each and every property, beginning with the closing statement, is critical for tax reporting and planning.

Ongoing recordkeeping should include paperwork showing revenue and expenditures, on a per-property basis. Revenue sources could include the following:

• Rent Receipts

• Advance Rental Payments

• Non-refundable Security Deposits

• Expenses paid by renters in exchange for rents – repairs or materials

• Services performed in exchange for rents

While rents are the primary income source, it is important to remember any and all alternative revenue sources connected with each property such as parking, laundry machines and/or vending machines.

REAL ESTATE EXPENDITURES COULD INCLUDE THE FOLLOWING:

• Travel, including accurate, written mileage logs

• Meals associated with travel

• Maintenance, repairs and cleaning (as distinguished from capital improvements, i.e., remodeling, alterations, additions, upgrades, that are deductible as part of the property depreciation).

• Landscaping and pest control

• Utilities

• Secured Loan Interest

• Property Insurance

• Property Taxes and HOA Dues

• Advertising

• Property Management Fees

• Legal or Professional Fees

• Depreciation (allocation of the cost of a tangible or physical asset over its useful life. For real estate, residential rental properties are depreciated over a useful life of 27.5-years. Commercial rental properties are deductible over a useful life of 39 years. Depreciation represents how much of an asset’s value has been consumed, in the form of an annual deduction, including the building and any capital improvements such as a room addition; bathroom or kitchen remodeling; new windows; roofing replacement, without inclusion of the actual land value).

The key is to develop and maintain a recordkeeping system that works for you. A file folder with copies of paid repair invoices and rent receipts along with records of the other expenses and income sources will work. Alternatively, there are electronic “file folders” in the form of apps on our smart phones to cloud-based accounting systems for our computers. No matter what route you choose to collect and keep this information, commit to “your system,” as it is critical to have these records for purposes of assessing cashflow and profitability and for tax planning. Having excellent records will help to facilitate the filing of the appropriate tax return. At the federal level, the two most common returns for property owners are the Individual Form 1040 or the Partnership Form 1065. The due dates for these returns should be added to your calendar to avoid a late filing and the possible assessment of tax penalties.

INDIVIDUAL – FORM 1040

For a calendar year tax filer, the date to file your return and pay the tax calculated on your return is usually April

15 of the year following the recently ended calendar year (April 18, 2023 for the 2022 tax year). For a tax filer using a fiscal year (a year ending on the last day of any month except December), the date to file your return and pay the tax calculated on your return is three months and 15 days after the close of the applicable fiscal year.

Partnership Form 1065

Typically a domestic partnership must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended. For calendar year partnerships, the due date is March 15 (March 15, 2023 for the 2022 tax year).

If the due date falls on a weekend or on a U.S. legal holiday, the due date for your return will be the next business day. In general, the tax shown on your return should be paid by the due date of the return, without regard to any extension of time for filing the return.

All that remains is to gather your property records and to make time to prepare your tax returns. Cheers and best wishes for another successful year as a property owner.