Owning a rental property is a great move for tax strategy and building wealth. For someone who has income and is already making large contributions to a retirement account, it is the next great move.

Another great move is having a side business, but having a rental property is also advantageous. Depreciation expense, also referred to as phantom cash flow, has great tax benefits. Unlike a primary residence, almost any money spent on a rental property is deductible.

Listed below, is a solid accounting & tax plan to use when having a rental property.

NOTE: In the text below, I speak a little about the legal side, but I am not an attorney and if you want more information about legal protection, please consult an attorney.

Rental Real Estate – Accounting & Tax Plan

1. Setup LLC for each property, having an LLC for each separate property provides max legal protection.
2. Set up EIN for each property.
3. Set up separate business bank account for each rental property. This way, the accounting is clear and concise for each property.
4. Set up a QuickBooks Online file for rental properties to record accounting transactions each month, perform bank reconciliations, and produce monthly profit & loss and balance sheet. We will present one column for each rental property on the profit & loss and balance sheet. Our fee is $200 per month per property for this monthly accounting.
5. If there is an anticipated $30k net income or more with all rental properties per year, set up S Corp tax entity. Each rental property is still LLC on the legal side, but then all rental properties are presented in the yearly S Corp tax return. This will save thousands of dollars in taxes each year rather than presenting each property on Schedule E of the personal tax return, form 1040.
6. If it’s expected that the rental property or properties will have a loss for the year, remember that it is a passive loss that can only reduce passive income. So, if wanting to be able to take a rental property loss to lower ordinary income (W2 income, K-1 income, schedule C, etc.), its required to be a real estate professional.

   Basically, a real estate professional is someone who:
   – Spends 750 hours on real estate activities during the year
   – More than half your work during the year is with real estate related work
   – Works actively on the rental properties
   – Having a real estate license makes it much easier to qualify.

7. If your rental property or properties has/have large amounts of net income, a cost segregation study can be an amazing tax savings strategy. Rather than using the regular depreciation rates, engineers determine the individual components of the house that can be depreciated in much larger amounts.

Please reach out if you would like assistance with this real estate plan!!!!

-THE VETERAN CPA-