Do You Own Real Estate? Time to Start Getting Your Tax Info Organized
As 2019 draws to an end, so does the deadline for tax deductions. If you own real estate or are a real estate investor, your income and potential tax deductions are likely top of mind. Homeowners who itemize their annual tax returns may be able to deduct property taxes and other expenses from their federal income tax bill. As we explain in Brian M. Douglas & Associates’ latest blog, if you own real estate, now is the time to start getting your important tax paperwork organized.
Collecting Tax-Related Documents
Getting your tax documents together every April doesn’t have to be a scramble. One of the easiest ways to stay organized is to keep all of the paperwork in one place. Find a large envelope or storage bin, label it “Tax Documents” (or however you prefer), and begin collecting your tax documents as you receive them in the mail.
If you purchased, refinanced, or sold any real estate during 2019, the escrow company will send you a final closing statement. This document is also known as a HUD-1 Settlement Statement. Be on the lookout for that document and make sure you include it in your Tax Documents envelope or bin.
Homeowners will likely be able to deduct their property taxes and other major maintenance and repair expenses from their annual income tax. So, make sure you keep tabs on those receipts and paperwork, and double-check that the tax authority has itemized these amounts in your bill. However, there are a number of property-related items that are not deductible. Homeowners cannot deduct fees for a delivery service (ex: water, trash collection), penalty fees (ex: HOA penalties), or assessments for local benefits.
House flipping is the practice of purchasing a house, making repairs and improvements, and then quickly putting the property back on the market for a profitable sale. House flipping can also involve the purchase and quick resale of houses purchased at auction. Typically, the IRS treats house flipping as a trade or business and taxes that business income accordingly – but be sure to verify this with your real estate attorney or tax advisor. If you are currently working on a house flipping project, it is a good idea to purchase materials, make repairs, and have the property inspections done before December 31st. That way, you can take those deductions for 2019. Note: while repairs such as fixing the HVAC or fence may be tax-deductible costs, the IRS considers major renovations as an improvement and not a repair. Improvements are not necessarily tax-deductible.
For those who rent out a residential property, the IRS will likely classify the rental income as passive income. Passive income is defined as earnings from an enterprise in which a person is not actively involved. Examples of passive income include rental properties, limited partnerships, or investment income. The IRS taxes passive income, but at different rates than active income.
If you are a landlord, it is a good idea to document the time you spend working on real estate activities. Include supporting materials like calendars, appointment records, and explanations of the work you’ve done. Also, be sure to keep receipts and invoices related to work on your rental property. As with house flipping, some of the significant repairs may qualify as improvements rather than tax-deductible repairs; be sure to consult with a real estate attorney or tax advisor.
Consult the Real Estate Lawyers at Brian M. Douglas & Associates
If you have additional questions related to property classifications and taxes, or if you need legal help with a real estate case, please contact the experienced real estate attorneys at Brian M. Douglas & Associates. We serve the entire Atlanta area. You can reach us by calling (770) 933-9009.