In case you haven’t noticed, tax season is upon us. And with it comes the annual scramble to get your finances in order before Uncle Sam comes knocking. If you’re a real estate investor, this can be especially daunting. They’re not just important; they can be the difference between profit and loss. With the ever-changing tax laws and regulations, it can be difficult to know where to start. 

We will discuss some key steps real estate investors can take to prepare for their taxes in 2023. Learn everything you need and confidently file your taxes. So, whether you’re a seasoned pro or new to the real estate investing game, read on to learn how you can prepare for taxes in the coming year.

Filing Tax in 2023

Filing taxes as a real estate investor can be a bit more complex than filing taxes as an individual, but with the right guidance and preparation, it can be done efficiently. Here is a detailed guide on how to file taxes with The Internal Revenue Service (IRS) for 2023 for real estate investors:

• Gather all of your necessary documents, such as 1099 forms, rental income and expense records, mortgage interest statements, and property tax bills.
• Keep accurate records of all your income and expenses related to your rental properties. This will help you take advantage of all the deductions and credits that you are eligible for.
• Determine your gross rental income, which is the total amount of rent you received from your rental property during the year before any expenses are taken into account.
• Calculate your rental expenses, including things like mortgage interest, property taxes, repairs, advertising, and insurance. Be sure to keep all your receipts and invoices, as you will need them to claim these deductions.
• Real estate investors typically use Schedule E to report rental income and expenses on their tax returns. You will need to fill out a separate Schedule E for each property you own.
• Real estate tax laws can be complex and ever-changing. Consult with a qualified tax professional or accountant when preparing taxes for real estate investors. This will ensure that you’re taking advantage of all deductions, credits, and other tax benefits that you qualify for. You will also avoid errors or oversights that could result in penalties or fines.
• File your taxes by the deadline to avoid any penalties and interest. You can find detailed information about filing tax returns for your state on the IRS platform.

Please note that this is a general overview, and consulting with a tax professional for specific advice is worthwhile, as tax laws and regulations are subject to change.

Real estate investors should plan ahead and ensure that they have all the necessary information and documents to file their taxes on time.

Key Take Aways

The important tax deadline to remember for real estate investors is April 18, 2023. On this date, all federal tax returns and payments are due to be filed. Real estate investors should plan ahead and ensure that they have all the necessary information and documents to file their taxes on time. Missing the deadline can result in penalties and interest, so it’s important to stay organized and on top of your tax preparation throughout the year.

For real estate investors who need more time to prepare their taxes, the extension deadline is October 16, 2023. This is the date by which an extension request must be filed to avoid penalties. Keep in mind that an extension to file is not an extension of time to pay. Real estate investors will still need to estimate their tax liability and pay any taxes owed by the April 18, 2023, deadline. It’s important to note that an extension to file is not a guarantee, and the interest and late payment penalty will still apply to any unpaid balance after the April 18th, 2023, deadline.

For the 2023 tax year, the standard deduction has been increased by the IRS. Single filers can claim a standard deduction of $13,850, married couples filing jointly can claim $27,700, and heads of households can claim $20,800. This means that for these taxpayers, the standard deduction is higher than it was in previous years and may be more beneficial than itemizing deductions. This change will affect many real estate investors, and they should consider if itemizing their deductions will give them a greater benefit or if they should take the standard deduction.

Real estate investors should also be aware that for the 2023 tax year, the income tax brackets have increased to account for inflation. This means that the income thresholds at which different tax rates apply have gone up, resulting in a slight increase in the tax rate for some taxpayers. This change will affect the real estate investors who are making more than the previous year, and they should expect to pay more taxes. It’s important to consult with a tax professional to understand how the new tax brackets may affect your income tax liability and to plan accordingly.

Real estate investors should also be aware that certain tax deductions, credits, and exclusions are only available to taxpayers who file as married or head of household.

Choose the right tax filing status.

When preparing for taxes, real estate investors must choose the right tax filing status. The filing status you choose can have a significant impact on your tax liability, so choose the one that best applies to your situation.

The five available tax filing statuses are:

• Single: for taxpayers who are unmarried or legally separated.
• Married Filing Jointly: for taxpayers who are married and choose to file a single return together.
• Married Filing Separately: for taxpayers who are married but choose to file separate returns.
• Head of Household: for taxpayers who are unmarried and have a qualifying dependent.
• Qualifying Widow(er) with Dependent Child: for taxpayers who are widowed and have a dependent child.

Therefore, it’s important to choose the right filing status and consult with a tax professional to ensure that you are taking advantage of all available deductions and credits.

Real estate investors should also be aware that certain tax deductions, credits, and exclusions are only available to taxpayers who file as married or head of household.

Keep Detailed Records

When preparing for taxes, real estate investors must keep detailed records of all income and expenses related to their investments. Keeping accurate records is essential for claiming deductions and credits and can also protect you in case of an audit.

Here are some key types of records that real estate investors should keep:

• Income records: Rental income, parking fees, laundry income, etc.
• Expense records: Mortgage interest, property taxes, insurance, repairs and maintenance, professional fees, etc.
• Mileage records: Traveling to and from properties, inspections, and meetings with tenants or contractors.
• Depreciation records: Records of the cost, depreciation, and the remaining value of any property you own.
• Rental Agreement: lease agreement with tenants, rent roll, security deposit, and other rental agreements.
• Closing documents: Purchase and sale agreements, closing statements, etc.

It’s important to keep all records organized and stored in a safe place, as the IRS may request them during an audit. By keeping detailed records, real estate investors can ensure that they are taking advantage of all available deductions and credits and minimizing their tax liability.

Our premium subscribers have access to our property records management feature on Property Onion. Let us help you keep track of your properties.

Actively claim above-the-line deductions and tax credits

When preparing for taxes, real estate investors should actively claim above-the-line deductions and tax credits. These deductions and credits can be taken on the front of the tax return, regardless of whether the taxpayer itemizes their deductions or not. This can help to reduce the overall tax liability and increase the tax refund.

Here are some examples of above-the-line deductions and tax credits that real estate investors may be able to claim from Kyle Handy:

Tax Deductions:

• Mortgage Interest: Taxpayers can deduct the interest paid on a mortgage for a primary residence or a rental property.
• Property Taxes: Taxpayers can deduct the property taxes paid on a primary residence or a rental property.
• Insurance: Taxpayers can deduct the cost of insurance for a primary residence or a rental property.
• Repairs and Maintenance: Taxpayers can deduct the cost of repairs and maintenance for a rental property.
• Professional Fees: Taxpayers can deduct the cost of professional fees, such as legal, accounting, and property management fees.
• Depreciation: Taxpayers can deduct the cost of a rental property over a period of 27.5 years for residential property and 39 years for commercial property.
• Business Use of Home: Taxpayers can deduct a portion of their home expenses, such as utilities and mortgage interest, if they use a portion of their home for business purposes.
• Travel and Entertainment: Taxpayers can deduct the cost of traveling and entertaining related to their rental properties.
• Home Office Deduction: Taxpayers can deduct a portion of their home expenses if they use a portion of their home as a home office.
• Self-Employment Tax Deduction: Real estate investors who are self-employed can deduct half of their self-employment taxes.
• Health Savings Account (HSA) Contributions: If you have a high-deductible health plan, you can contribute to an HSA, and the contributions are tax-deductible.

Tax Credits

• Low-Income Housing Credit: Taxpayers can claim a credit for building or rehabilitating low-income housing.
• Energy-Efficient Home Credit: Taxpayers can claim a credit for making energy-efficient home improvements, such as installing solar panels or upgrading the insulation.
• Rehabilitation Credit: Taxpayers can claim a credit for rehabilitating a certified historic building.
• New Markets Tax Credit: Taxpayers can claim a credit for investing in businesses and real estate projects located in low-income communities.
• First-Time Homebuyer Credit: Taxpayers who purchase a primary residence for the first time may be eligible for a credit of up to $8,000.
• Passive Activity Credit: Taxpayers who passively invest in real estate can claim a credit for certain activities that are considered passive income.
• Rehabilitation Credit: Taxpayers who rehabilitate a historic building that is used for business can claim a credit of 10% or 20% of the rehabilitation expenses.
• Renewable Energy Credit: Taxpayers can claim a credit for certain renewable energy systems, such as solar, wind, and geothermal systems.
• The Retirement Savings Contributions Credit (Saver’s Credit): Taxpayers who make contributions to a retirement account may be eligible for a credit of up to $1,000.
• The American Opportunity Tax Credit (AOTC): Taxpayers who pay for higher education expenses for themselves or a dependent can claim this credit of up to $2,500 per student per year.

It’s important to keep in mind that the above-the-line deductions and tax credits are subject to certain limitations and restrictions, and it’s always a good idea to consult with a tax professional for specific advice and guidance. Actively claiming these deductions and credits can help real estate investors to reduce their tax liability and increase their tax refund.

Using a registered tax agent or accountant when preparing taxes for real estate investors can be a wise decision. They have the expertise and experience to help you navigate the complex tax laws and regulations that apply to your specific situation and can help you identify and take advantage of tax-saving strategies that you may not be aware of.

Maximize Tax-Saving Strategies

Maximizing tax-saving strategies when preparing taxes for real estate investors can involve several different tactics. Some strategies that may be useful include:

• Taking advantage of deductions for mortgage interest and property taxes, which can be significant for real estate investors.
• Depreciating the value of rental properties, which can provide a significant tax benefit over time.
• Setting up a legal entity, such as an LLC or partnership, to hold your rental properties. This can provide liability protection and may also offer tax benefits. To gain more insight into the process of establishing a legal entity, please visit Forbes for further information.
• Keeping accurate records and receipts of all expenses related to your rental properties, such as repairs, maintenance, and advertising costs, as these can be used to offset rental income and reduce your tax liability.
• Consider taking advantage of 1031 exchange to defer the capital gain taxes when you sell a property and invest in another one.

With the right preparation, you can have peace of mind and focus on growing your portfolio.

Consider using a registered tax agent or accountant.

Using a registered tax agent or accountant when preparing taxes for real estate investors can be a wise decision. They have the expertise and experience to help you navigate the complex tax laws and regulations that apply to your specific situation and can help you identify and take advantage of tax-saving strategies that you may not be aware of. They can also help ensure that your tax returns are accurate and filed on time, which can help you avoid costly penalties and interest.

An accountant or tax agent can help you with the following:

• Review your income and expenses to ensure that you are taking advantage of all deductions and credits that you qualify for.
• Help you set up and maintain accurate financial records, which will be necessary for preparing your tax returns.
• Advise you on the tax implications of specific transactions or investments, such as buying or selling a rental property or investing in a 1031 exchange.
• Represent you before the tax authorities, if necessary.

It is always advisable to consult with a qualified tax professional or accountant when preparing taxes for real estate investors because the laws and regulations related to real estate taxes are complex and ever-changing. This will help you to make the most of your deductions, credits, and other tax benefits and to avoid any errors or oversights that could result in penalties or fines.

By subscribing to our premium services on Property Onion, you have the opportunity to receive professional assistance from tax experts or accountants within our network.

Stay on track

The most important thing to remember is that you can’t take your tax situation for granted. You need to be proactive, especially if you’re planning to sell your properties. Don’t let taxes be a burden on your real estate investments, make sure to consult with a tax professional who can provide you with specific advice and guidance tailored to your unique situation. 

With the right preparation, you can have peace of mind and focus on growing your portfolio. Remember, start preparing early and stay organized so that you can file your taxes with confidence and have more time to focus on growing your real estate investments.