Tax Strategy for Landlords

May 14, 2023

Reduce Your Rental Property Income Taxes

As we close out year 2023, the matter of property tax deductions is the hot topic.

For many landlords in high tax cities and states, the matter of taxes owed is a huge business problem. As the chart shows, high taxes are an estimated 34% of operating expenses.

Taxes as a share of Property Management Expenses. Infographic courtesy of the National Apartment Association.

While finding ways to reduce your 2023 rental property tax pain will help, you probably need to be working with an accountant to tackle tax management as a long-term project. Only tax strategists have a true love for tax minimization techniques.

However, appreciating your tax strategies should help inform your investment strategy, asset management strategy, operational strategy and business expenses. Tax in the coming years may be your number one business issue and you’re wise to discover all your tax deduction. It’s already the top expense for apartment owners according to NAA.

Get some helpful tax preparation apps and books on tax management.

Books on Tax Strategies. Screenshot courtesy of Bigger Pockets Publishing

The Endless Tax Nightmare

How many taxes are there? How about property tax, sales tax, income tax, business taxes, capital gains tax, estate taxes, and other levies and local fees? The challenge is more than just property tax assessments.

There is no tax strategy without accurate accounting and without that, you’re vulnerable to a tax audit. Certainly adopting professional dedicated property accounting software, designed specifically for rental property management is a big helper. Modern management begins with your software.

Landlords have had it tough with governments in the past two years. They suffered big income losses and some lost properties. You’re making up ground now with rising rents and lower rent default. You’ll be spending money and paying a lot more tax.

We’ve got some tax reduction ideas below, and your tax accountant will know the best tactics for you. Let’s give them support for lowering your 2021 amounts due and higher tax loads in the many years ahead.

What is a Tax Strategy for Landlords?
A tax strategy is a method of reducing property taxes, sales tax, income tax, and other taxes to help you pay the least amount of tax allowable by law (ethical/legal). It helps you manage your rental property business income, understand how your business structure affects expenses, deductions and tax payable, and which of your expenses are deductible. It’s not just avoiding last years burden, or next years. The tax strategy helps you make better business decisions to help you avoid paying too much tax over the next ten years.

The Only Certainties: Death and Taxes

It seems every year apartment landlords and rental house landlords suffer increased tax losses. As if the pandemic era wasn’t bad enough, the stimulus spending and government debt loads will lead to increasing taxes on you. In some states mentioned below, the tax burden will become a serious threat to your business. Other landlords are dealing with it by raising rents where possible. Others will vacate the sector or state and leave you to pay the full government tax burden.

Local, city and state governments are cash-strapped and the easiest way for them to fund their operations is to raise property taxes and fees. And they keep doing it every year.

Rising property taxes encourage some landlords to move to tax-friendly states, and invest in new rental income property in those states.

Hawaii, Arizona, Colorado, Utah, Idaho, Tennessee and Nevada offer the lowest property tax rates. Florida’s and Texas’ property taxes are higher, yet rental real estate there is in big demand with rising property prices and rents to contend with.

Low Property Tax States:

Hawaii 0.35%
Colorado 0.49%
Nevada 0.53%
South Carolina 0.55%

Worst States for Property Tax:

New Jersey 2.44%
Illinois 2.3%
New Hampshire 2.2%
Connecticut 2.07%
Texas 1.83%
California .74% (California is proposing much higher rates)
Texas and Florida offer other benefits such as no income tax which might appeal to some investors.

According to the US Census Bureau, the average homeowner in New Jersey pays $8362 in property taxes for their average-priced home each year. New York and Massachusetts property owners are next in the tax burden race. Given that it’s estimated homeowners owe about $14 billion in unpaid property tax, we know owners and investors are struggling with the tax problem.

Massive Tax Bills in California

In Marin County California, the average property tax bill alone is $13,257 or $1100 a month. In Miami, it’s $5000 yearly. And in Clark County (Las Vegas) it’s just $2185 annually.

The loss of the 1031 exchange will hurt some small to mid-sized landlords in the US. About 12% of real estate sales are through a 1031 exchange, which was a nice benefit for rental property investors to buy and sell tax-deferred real estate throughout life. Landlords looking to buy and sell real estate in 2022/2023 may face some tough tax decisions.

It shows us clearly how heavy taxation actually shapes our business and investment environment. But rather than moving, you might want to consider all tax strategies to help you survive. And you can use ManageCasa to manage your accounting, and aid in executing your property tax reduction strategy.

ManageCasa offers excellent tools for helping save time, visualize expenses and losses, maximize deductions, and producing tax ready financial reports. Your accountant will be grateful and have more time to help you with tax strategy.

In this post, we hope to get you focused on saving money, and let you pursue more effective tax reduction strategies with your accountant.

What Are Your Basic Tax Deductions?

taxes paid
wages
operating expenses (office, software, leasing, utilities)
insurance
property management contractors/HOA fees
mortgage and other debt interest
repair and maintenance
property improvements/renovations/upgrades
landscaping and snow removal
travel, conventions and conference fees, mileage, meals
bank fees
rent default and eviction and court costs

Landlords Winging a Tax Reduction Strategy

Do you have a tax minimization strategy? One third of landlords don’t even have an accountant, so it’s likely half of rental property owners don’t have a solid strategy to keep tax losses low. They’re winging it but it’s tough to outmaneuver Uncle Sam.

Tactics and Checkpoints

property taxes are calculated by multiplying your municipality’s effective tax rate by the most recent assessment of your property — check all the numbers
request a copy of your property tax card from the local assessor’s office
review your property card to find any discrepancies and raise those oversight’s/errors with the tax assessor
review how much tax you pay compared to other comparable apartment buildings, houses and properties in your area
review the changes you made to your property that were assessed perhaps unfairly and dispute the assessment
review your intended rental renovations and the deductions and tax load it may create going forward
make the tax assessor walk with you through your rental property during your assessment
do your research and find local and state exemptions or discounts you could apply
file a tax appeal to lower your property tax bill
understand the mill rate before you buy any particular property and where things are headed in that jurisdiction (review that government’s debt load)

Begin with Your Rental Property Tax Deductions

Items you can include in your property expenses to lower your tax payable:

property maintenance expenses
depreciate property and mechanical equipment
casualty losses
construction and property improvement costs
financing expenses
mileage, meals and travel expenses
business operation expenses (wages, office and home office expenses, water and heating bills, marketing, advertising, software, phones, laptops, auto depreciation and gasoline, digital bills)
property management, HOA, legal and accounting fees
applicable taxes, interest and insurance
fees for credit checks

What Might be the Best Property Tax Strategy?

The best tax strategy is to maximize your deductibles and manage your tax accounting professionally so you’re not audited.

Avoiding future capital gains tax (+39%) is important. Plan to hold onto your properties long enough to access a lower capital gains tax.

Overall, you may need to prepare to sell low profit rental property in high tax states now and buy property in high-profit, growing, low-tax states. The strategy is simply to avoid an even higher tax burden ahead. You may want to transfer property to your heirs. In Florida for example, there is no estate tax. Migration to Florida is high so you know rental property owners in Massachusetts, New York and Connecticut are doing this too. Review all retirement savings plans and accounts to ensure you protect your money.

Do all you can to move yourself down into a lower tax bracket. Use the gift tax credit and conduct repairs/renovations to lower your taxable income. Max out on depreciation if possible in the high-income years coming. Act now before the Build Back Better tax load hits.

View your full tax burden and not just the property tax burden. Using your property accounting software, you can organize your expenses better and give your tax advisor accurate information.

Learn more about ManageCasa’s accounting software features and how you can make tax time a breeze.

Additional Resources:

Tax Accountant Directory — picnictax.com/accountant-directory

Tax Buzz Directory — www.taxbuzz.com

IRS Tax Advice — irs.gov/tax-professionals/choosing-a-tax-professional

Certified Public Accountant Directory — cpadirectory.com/certified-public-accountants/search

Enterprise Tax Accounting — pwc.com/us/en/services/tax/tax-accounting.html

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