Your Year-End Rental Property Checklist

Real estate tax law is one of the most complicated in the tax code. Anytime you read articles or consider tax strategies, always run your choices by your accountant. We’re approaching the end of the year, and tax considerations are critical. While we should be continuously reviewing our rental property tax situation throughout the year, there may be important end-of-year decisions that can influence not only the current year, but future tax years as well.

There are three areas in which there can be some flexibility in deductions:

1. Indentify improvements versus repairs

Repairs keep a property at its normal operating condition, while improvements modify a property’s use, enhance its value, or extend the property’s life. Repairs are deducted in the year they’re expensed, while improvements are depreciated over time. The classification as either a repair or an improvement can have a dramatic impact on your taxes.

2. Review your depreciation

Especially in the first year of ownership, decisions about depreciation deductions can also be very important for tax liability. It’s easy to assume that you should maximize depreciation, but that may not always be the case. This can depend on how you’re able to handle your real estate investment losses. If they’re not limited, maximizing depreciation can cut your tax liability a lot.

3. Review your losses

There are very specific rules for how real estate investment losses can be handled. Work with your accountant to determine if your losses will be allowed in full or limited based on your investment income. The treatment of losses can change each year.
Celebrate the holidays, but do some work as well on your real estate investment tax situation.