How San Diego landlords save on federal taxes in 2021. Save money by paying fewer taxes and avoiding penalties.
Nowadays, anyone can invest in rental properties. We even found legitimate ways in How to Invest in Rental Property with Little Money. Also, San Diego real estate companies explain How To Invest In Multi-Family Real Estate.
Once you earn substantial profits as a landlord you need to think of legal ways to pay lower taxes. That’s why we published this post to help you find deductions to save taxes in 2021.
How San Diego Landlords Save Taxes In The 2021 Tax Year
Follow these steps to use tax deductions and credits in the 2021 tax year.
Verify Your Contractors and Vendors Information to Avoid IRS Penalties
You need to make sure you have the correct mailing address and federal tax I.D. number for each one.
Your contractors and vendors must only provide services and items specifically related to your rental properties. Never mix their products or services with personal usage.
For instance, if you rent an office or a room attached to your home to a third party. Make sure that you only use the items purchased for the office or the rented room. Separate any contractor repairs or maintenance in your personal home from the ones performed in the rented office or room.
File IRS 1099-MISC forms
As a landlord, you must issue 1099s to every service provider related to the rental property you compensated with $600 or more. This includes laborers and handypersons you hired during the 2021 tax year.
Failing to issue a 1099 to these persons may result in stiff penalties from the IRS.
- Less than 30 days late – $50 per statement up to $194,500 maximum;
- 31 days late up to August 1 – $110 per statement up to $1,669,500 maximum;
- After August 1 or not at all – $270 per statement up to $3,339,000 maximum; and
- Intentional disregard – $550 per statement with no maximum limit.
Send the 1099-MISC forms to all recipients and the IRS by January 31, 2022. Pay attention to Box 7 for the amount of non-employee compensation.
Tax Deductions for San Diego Rental Income Taxpayers in 2021
Take advantage of every rental property deductible expense. You must keep excellent records of the expenses related to your income property, who you paid, the amount, and the purpose of the expense.
Examples of rental income-related tax deductions include:
- Property tax;
- Property repairs and maintenance;
- Mortgage interest;
- Travel costs;
- Operating expenses; and
You must keep all receipts for these expenses in a safe place to justify your deductions in case the IRS audits you.
Learn about the above deductions such as:
- Depreciation – Investopedia teaches you all about Writing Off Depreciation on Rental Properties;
- Travel costs – Nolo lawyers show what travel expenses are tax-deductible for landlords;
- Property repairs and maintenance – The IRS explains how to deduct these expenses Here;
- Operating Expenses – This site explains all the other deductions above and more, Top 18 Landlord Tax Deductions; and
- Insurance – We also published a post explaining Insurance Policies for Landlords (What You Need To Know).
Save Money on 2021 Taxes by Spending Money on Your Rental Properties
As an old saying goes, “You need to spend money to make money”. It works the same with rental properties tax deductions. Especially when your rentals generate substantial profits.
Just before 2021 ends, consider making pre-payments to recurring bills like insurance, future travel costs, landscaping, and disposal. These will lower your income for 2021 amounting to paying fewer taxes.
Near the end of the year, determine ff you face income bumping you into a higher tax bracket for 2021. If so, consider reducing your income by making early repairs and purchasing items you need in 2022 in December. Examples include repainting, replacing worn-out furniture and appliances, and mending broken fences.
To further save money, WeLease published a post about How to Make Rental Property Improvements Under $500.
Funding Your Retirement Accounts as a Real Estate Investor
Most retirement accounts require funding for the previous year by April 15. But some retirement accounts set a deadline by December 31. Review your retirement accounts to see if any allow payments by December 31.
Consider a Roth IRA (if you don’t have one) if your rental income substantially grows in 2021 to keep your profits tax-free. Or, if your 2021 rental income looks low or you lost money during the year, you might want to convert your Roth IRA into a traditional IRA without triggering any taxes or penalties.
Know your options to see what works best for your 2021 income to create significant tax advantages.
Also, learn how to increase your rental income from our post How to Make Millions with Rental Properties.
Prevent a Tax Hit When You Sell Real Estate
Always weigh the tax advantages when selling investment properties. The best move occurs when you sell your properties at a gain in a tax year with significant tax breaks creating less taxable income.
Every landlord experience unique situations depending on the local market. Especially in a local market stronger than the national average like San Diego. Consult with a CPA or a tax attorney before deciding to sell.
Of course, using an IRS Section 1031 Like-Kind Exchange to sell your income property to replace it with other qualified properties allows you to defer your capital gains. To learn more about 1031 Like-Kind Exchanges Click Here.
You might consider using a Limited Liability Company (LLC) for your future real estate investment properties for more tax savings. We published a post called How To Use an LLC for Every Property Purchase.
Protect Your Tax Season Data
Data theft occurs every day. This puts your financial and personal information at risk. Cybersecurity issues arise more often during the tax season and holiday shopping season. Not only must you protect your information, but also your tenants.
Take these steps to keep your data safe and prevent thefts during the tax season:
- Using unique, strong passwords for every online account;
- Taking advantage of 2-factor authentication for your email, financial, and social media accounts;
- Using caution when answering phone calls and opening emails. The IRS doesn’t use emails or phone calls to contact taxpayers requesting financial or personal information;
- Avoiding doing business transactions on unsecured WIFI public areas. Even a neighbor might hack your WIFI; and
- Using credit monitoring services to check activities you do not recognize.
We hope you enjoyed learning how San Diego landlords can save taxes in 2021. Our tips will save San Diego landlords money by paying fewer taxes and avoiding penalties.
Tax filing for rental income investors always becomes complicated. Yet, keeping detailed and well documents records makes the process easier. Planning ahead of the tax year-end allows you time to seek more deductions and credits based on your estimated rental income.
Always consult with a real estate tax attorney or a CPA familiar with California rental properties tax laws.
Disclaimer: This blog post intends to give you general information about federal taxes. It does not intend to give you legal, tax, or financial advice about your situation. Consult with your CPA or attorney or any other financial advisor about your specific situations.
Contact Us to see how we assist landlords with lowering their taxes in 2021 and beyond.
Now that you learned how to save money by paying fewer taxes in 2021. Enjoy life without the landlord’s hassles. Let us deal with your tenants’ problems, screening new renters, rent collecting, repairs & maintenance, evictions, and maintaining records.
Steven Rich, MBA – Guest Blogger
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