Real Estate Investing #6: documentation and tax prep
December 1, 2014
Our 2013 taxes were finally stowed, just ahead of the October filing deadline, and I’m staring down the barrel of prepping for 2014’s filing in just a few months.
I thought this might be super boring but Anne asked so I’m sharing!
I like to think I’ll have my paperwork in order for the CPA but this whole new investing thing introduces a whole other tangle so, lest I lose my ever-loving mind trying to figure it out as deadlines loom, the spreadsheets and IRS.gov have been cracked open. Feels somewhat like being a junior in high school, prepping for the SATs, again!
There’s a ton of documents to wade through but these were the highlights for both immediate and long-term planning:
Reporting Income
I had to decide what reporting method to use between Cash Method or the Accrual method. Reading up on the two, it’s not clear whether there’s any benefit to do one over the other, tax-wise, but the cash method seems most straightforward.
Cash method. You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.
Expenses paid by tenant. If your tenant pays any of your expenses, those payments are rental income. I don’t expect to see any of this crop up but it’s good to know. I’d hate to accidentally under-report income for not knowing it was considered income!
Long Term Income: Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
Reporting Rental-related expenses
There are a myriad of expenses I’m recording on my spreadsheet: maintenance, insurance, taxes, interest, commissions, management fees, legal and other professional fees, repairs.
Depreciation and Cost Basis
The value of the rental property is depreciated based on the date it is ready and available for rent, this is called the date it was “placed in service.”
Next Steps and Final Numbers
The CPA and I will need to put our heads together and sort out how it looks once we run the actual numbers.
The subtleties of cash basis & accrual methods have long escaped me. In these parts, I just try to be sure everything is entered accurately in Quickbooks and then fork it over to the CPA.
Yep. I’ll be working with the CPA because I just don’t have the time to deal with all those nuances at this point.
I’m fascinated that you get to depreciate the asset! That’s pretty interesting.
Cash-basis is easier for a small timer, that’s for sure.
Thanks for the follow up 🙂
Of course, just glad that you expressed an interest 🙂
I really do think we’re just going to stick with the simpler (seeming) cash basis approach. I don’t think there’s any good reason not to, given what I don’t really know at the moment.