Tax season is here and the American people are starting to file. As of the first week of February, more than four million Americans have filed their taxes.
Over the past few years, there have been major changes to the federal tax code. New policies like the state and local tax (SALT) cap and advanced child tax credit (CTC) are impacting filers’ bottom lines.
In this article, we discuss how to organize your property tax records. Read on to see how business owners and high-income earners structure their tax records. Explore topics such as the federal solar tax credit and managing an investment property.
Property Taxes
Homeowners pay various property taxes on their primary residence. Property taxes are paid to municipal and county governments to fund constituent services.
At the beginning of a new year, your mortgage company sends Form 1098. This is a statement that captures how much mortgage interest you paid over the course of the year.
Also on the form is a block for real estate taxes paid. You should retain the 1098 form as part of your tax records. Both mortgage interest and property taxes are deductible from a business or individual tax return.
However, many tax filers receive a 1098 form with an empty block for real estate taxes. This block is only filled out if your mortgage company is responsible for paying property taxes. Many homeowners use an escrow account managed by their mortgage company to pay property taxes.
Those with a 20% or more equity position in their home can opt-out of this service. These homeowners are responsible for making their own property tax payments.
If this is the case, the document to retain comes from the local tax assessor. This form includes general information on your property and how much the net property taxes were for the year.
SALT Cap
When the Trump administration reformed the tax code, they implemented a cap on SALT deductions. In the past, tax filers could deduct the entirety of the property taxes they paid each year.
Instead, there is now a $10,000 cap on SALT deductions. To make matters worse, this cap includes state income taxes as well.
This is problematic for states with high taxes. Coastal states such as California and New York are significantly impacted by the SALT cap.
For high and middle-class income earners, the $10,000 cap is easily reached. In New Jersey, for example, it is not uncommon for homeowners to pay more than $10,000 in property taxes alone.
Home Office
You may be able to write off property tax expenses if you conduct business out of your home. There are many rules that dictate whether you can claim a home office or not.
Generally, you cannot deduct property taxes for areas of the home that you combine for business and personal usage. If the area is exclusively used for business purposes, you may be able to reduce your taxable income.
As far as tax records go, you need to determine the percentage of home floor space used exclusively for the business. A home drawing or blueprint is one way that you can document the business footprint.
Federal Solar Tax Credit
Have you recently transitioned your home to solar power? You may qualify for the federal solar tax credit.
This is a program designed to incentivize Americans to switch to solar. Both federal and state governments are motivated by a desire to reduce the burden on the energy grid and extend clean energy sources.
Buying solar panels, associated equipment, and installation services is a considerable upfront expense. The good news is that you can qualify for a 22% tax credit on these costs to make it more affordable. You should save any receipts or payments made to convert a property to solar.
Property Investors
It is important to differentiate between the typical homeowner and a property investor. The IRS rules for business taxes are different. Deductions for a primary residence may be more generous than those for an investment property.
Read on to learn what tax records you should retain as a property investor:
Rental Income
Real estate investors typically earn income from rent. Whether it is a vacation property or a long-term rental, this is the primary way to profit.
You need to record any payment accepted by an occupant of the property. Any advanced rental payments are recorded in the tax year they are received. Security deposits are considered advanced rental payments and are also recorded in the year received.
Business Expenses
Reviewing your business expenses is another part of the tax preparation process. Property investors incur many of the same expenses that the typical homeowner does.
You should save receipts for all ordinary expenses incurred for homeownership. This includes expenses such as property taxes, mortgage interest, and homeowner’s insurance. Other ordinary expenses include utilities, advertising, and home security.
Some materials, supplies, and repair services are deductible. Nonetheless, home improvements costs are generally not deductible.
Maintaining Good Records
As a property manager, there are many records and documents to maintain. It is sound advice to keep a record of any income received or expense incurred. You can review each document with your tax professional to see if it is relevant for taxes.
Canceled checks are one way to substantiate income or expenses. Bills received and paid out for the investment property are also necessary. It is wise to set up specific folders for each type of expense. For instance, you can use a folder for utility expenses and save all 12 months’ worth of bills here.
Some expenses are paid online in today’s increasingly digital world. Print out a copy of the payment confirmation and store it in the applicable folder.
How to Organize Your Property Tax Records
You are now ready to save everything you need for an individual or business tax filing. Property taxes are a significant incurred expense and it is critical to save all payment records. This way, you can reduce your taxable income to the maximum extent possible.
If you need help with organizing property tax records, contact us today to meet with a tax professional.
Claudia Grant
