It’s great when you have the funds to invest in real estate because you can usually expect a pretty nice ROI here. But at the same time, you might want to keep in mind that there’s usually one payment that causes the whole problem. You’re looking through the bank statements, trying to get everything ready for the accountant, and there it is: some money was paid to a contractor eight months ago. Maybe you remember the work. Well, sort of at least.
Maybe there was something with the bathroom, a bit of plastering, a new fan, some painting, and something else. But now, well, maybe now, it’s tax season. And “work at rental” isn’t quite the detailed explanation it seemed to be back then. So, that’s why the first tax year can be a lot more awkward than expected, believe it or not. It’s not just rent coming in and repairs going out. Well, plenty of other costs too, actually. If this is your first time ever investing and making a profit from a property, well, you’ll be in for a rude surprise.
The Money Spent Before the Tenant Moved In
Well, a lot can happen between getting the keys and handing them to a tenant. For example, here, the walls get painted, locks are changed, a broken appliance gets replaced, the garden is cleared, and somebody discovers that the shower only drains properly if nobody uses the sink at the same time.
Basically, here, all of that spending feels connected to getting the property ready, because it is, but that doesn’t automatically make every payment a straightforward rental expense. The date the property became available to rent can be important. That may not be the day the tenant moved in, either. If the property was ready, advertised, and available before the tenancy started, that can change how certain costs are treated.
This is why keeping dates helps. Not just the date on the receipt, but what was happening with the property at that point too.
Yes, You Need to Learn About Depreciation
The building, appliances, fixtures, furnishings, and improvements may all have different treatments, but you can’t make assumptions. Sure, you can do some research online or even ask around (like other landlords), but it’s still a bad idea here. The first year is a sensible time to ask how the property’s purchase price should be allocated, when depreciation starts, what can be depreciated separately, and how later improvements should be added.
For some income-producing properties, a tax adviser may also bring up a cost segregation study. Why? Well, a review like that looks at separate parts of the property and may identify assets that qualify for shorter depreciation periods. But of course, here it still has to make sense for the actual property and the owner’s wider tax position. Bigger deductions earlier can sound appealing, but future years and the eventual sale need to be considered too.
No, the Mortgage Payment isn’t One Simple Deduction
Oh yes, this absolutely has to be brought up here because, for whatever reason, this one catches people out because the full payment leaves the account every month, so it feels like the full amount should count as an expense. But part of that payment may be interest, while another part pays down the loan principal. Those are different things. There may also be lender fees, escrow amounts, insurance, and taxes mixed into the same payment structure.
Honestly, here, that list could just go on. Keep the annual loan statement and the original loan paperwork. Also, you absolutely need a separate bank account for this. So if you don’t have one yet, make one ASAP!
Think About the Closing Costs Too
The closing paperwork can be a lot, and once the purchase is finished, it’s tempting to shove everything into one folder and never look at it again. Makes total sense. But there’ll usually be legal fees, lender charges, surveys, inspections, taxes, insurance payments, and other costs all sitting close together. They may have arrived during the same week, but they don’t necessarily get handled the same way, right? So no, putting the whole lot under “buying expenses” probably won’t be enough.
All it really takes here is just keeping the solicitor’s invoice, the settlement statement, the loan documents, the insurance records, and anything that explains what each payment was actually for. And one more thing here, just keep in mind that a bank statement only proves that money left the account. It doesn’t explain why, and that’s the part that starts to matter later.
collaborative post