As a landlord, you are trying to maximize returns on your investment. However, you don’t need to hide income to keep more money in your pocket. The tax code already gives you more than enough legitimate methods to reduce your overall tax burden. Continue reading below as we take a look at the smart deductions that may transform your rental property from a tax headache to a wealth-building machine.
Things to Declare as Rental Income
Your rental income is not just the monthly rent check that you get. The IRS wants to know about every dollar that flows from your property into the bank account. Missing small income sources can trigger problems down the road, and you never want that to happen. Here are the things you need to declare as rental income.
Late Fees
Did your tenant pay the rent three days late? Then the late fee you get from the tenant will count as income. It can be as low as $50, but you will need to report it. Late fees will add up faster than you think. If you charge $75 per late payment and three tenants pay late twice a year, you will have $450 worth of unreported income. The IRS computers are smart enough to catch patterns like this.
Pet Rent
Landlords nowadays charge a monthly pet fee. It can be as low as $25 per month. However, that can add up to $300 a year. Many landlords believe that pet rent will not count because it is separate from the base rent, which is wrong. Any recurring payment tied to your property will count as income.
However, the pet deposit will work differently. If the deposit is something refundable, you don’t need to report it as income. You should only report what you keep for damages.
Laundry Income
Do you have coin-operated washers in your building? Those quarters will count as rental income as well. The same is applicable for vending machines that you own on the property. You should have a method to track this income every single month, as you can easily lose track of it. This is where you can set up a simple system to count the coins on the same day each month.
Some landlords use apps to track laundry card transactions. This will create an automatic paper trail, and the IRS would love to see such documentation.
Non-Refundable Deposits
Non-refundable deposits trip up many landlords. Any deposit you label as non-refundable will be income on your side. For example, let’s assume you charge a $500 non-refundable pet deposit from the tenant. Then you should report that $500 as income in the same year you receive it.
However, security deposits will behave differently. You are holding them in trust, and you should report only what to keep for damages when the tenant moves out. That’s why you need to keep funds in a separate account to avoid confusion.
Application fees will count as income as well. You may charge $50 to process a rental application. This rental should go on your tax return. Some landlords try to call this “administrative fees”, so that they can avoid reporting. You should never make that mistake. That’s because the IRS is aware of these games.
Declaring rental property income can help unlock tax benefits that make real estate a great investment. Hence, you should be 100% clear on what to report and what not to report.
Is it Possible to Build Wealth Through Transparency?
Yes, it may be possible to build wealth through transparency in rental income. Maintaining full transparency is not just ethical, but it can be profitable. All you have to do is report your full income honestly, and then you can unlock the full power of rental property deductions. These deductions can often exceed your rental income.
Imagine that you are collecting annual rent worth $24,000. On top of that, you will be earning $1,200 in other income. That will come to a total of $25,200. Now here’s where things get interesting. You will have $8,000 in mortgage interest, $3,000 in property taxes, and $2,500 in repairs. On top of that, you will have to allocate $1,500 for insurance and $5,000 for property depreciation. It will add up to a total of $20,000.
In this situation, your taxable income will just be $5,200. However, we have not even counted utilities, property management fees, or mileage to the property. Many landlords end up with paper losses while cash continues to flow into their accounts.
Honest reporting will protect you from audits because IRS computers flag returns that don’t match expected patterns. Rental properties in your neighborhood generate income at certain levels. What would happen if your numbers look too different? This may raise some concerns as IRS audits everything.
Sometimes you may be able to survive an audit, but the stress you have to go through will not be worth it. Audits may take time and cost money for professional help. By sticking to transparent reporting, you can hand over your records with confidence.
While managing all this work, you will not be able to give your tenants the attention they deserve. That’s where you should work with experienced property managers. A dedicated Delaware property management team can help implement rigorous tenant screening to secure long-term, reliable renters.
Final Words
Smart rental property wealth will come from playing the long game. You should continue to report everything that you earn to offset that income with every deduction the tax code allows. Mortgage interest, property taxes, repairs, insurance, and depreciation will all help you to reduce your tax burden. You can do that legally, and you will not be hiding any income while continuing to build real wealth.
While keeping this in mind, start tracking your income from today! Your future self will thank you for that.
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