Well, it’s time to pay taxes.
Again.
What does this mean for you, as a rental property owner in Philadelphia?
It means you have to declare the income you’ve received in rents and other revenue. That’s going to be taxable.
But, there are plenty of deductions available to you that can help you avoid a lot of tax liability and keep more of your earnings. You have to know what you’re eligible to write off and where you have to be especially careful about documentation.
We are not tax accountants nor are we CPAs or attorneys. We are Philadelphia property managers, however, and we can tell you where your rental expenses are especially beneficial according to the IRS.
Always work with a financial professional when you’re filing your taxes. As you’re preparing your paperwork and crunching the numbers, here’s the best advice we can provide to you when it comes to incorporating rental property income and expenses into your tax filings.
Taxable Philadelphia Rental Income
Rental income is easy; this is the amount you receive from tenants for the use of your property. Certainly, you understand that this income must be reported to the IRS annually when you file your taxes. This includes not only monthly rent payments but also any other charges paid by tenants, such as utility payments or lease cancellation fees.
Important Points on Rental Income:
- Advance Rent. Any rent you receive in advance is included in your rental income in the year you receive it.
- Security Deposits. If you return the security deposit to your tenant, it generally isn’t considered income. However, if you keep part or all of the deposit to cover damages, this amount must be reported as income.
- Property or Services. If a tenant provides services instead of paying rent, the fair market value of the services should be reported as rental income. We never recommend this as a good way to have tenants pay rent.
Philadelphia Rental Property Tax Deductions
The IRS considers your rental property to be a business, and that means you’re allowed to deduct various expenses related to operating and maintaining your rental properties. Here are some of the most common deductions that investors and landlords will take on their taxes:
- Mortgage Interest. Deduct the interest on the mortgage used to purchase your rental property. You’ll be able to find the amount of interest you’ve paid over the year on your statements provided by the lender or financial institution.
- Property Taxes. Local property taxes are fully deductible, so keep records of your property tax payments and make sure you write them off on your federal return.
- Repairs and Maintenance. Expenses like fixing leaks, repainting, or replacing broken windows can be deducted. When you have professional vendors and contractors making the repairs, you can deduct the cost of labor as well as supplies. Anything that keeps your property habitable can be deducted. Be mindful not to deduct for improvements. Only those expenses that keep your property maintained can be deducted at tax time.
- Depreciation. Over time, wear and tear on your property can be written off through depreciation. According to the IRS, the rental property you own will deteriorate over a period of 27.5 years, and you can use that number to recoup some of the money you’re paying in taxes on rental income. Be sure to consult with a tax professional to accurately calculate this deduction. It can get tricky.
- Utilities. If you pay the utilities for your rental property, such as water, gas, and electricity, these are deductible.
- Insurance. Insurance is an essential part of protecting your property, and the premiums you pay for policies covering property damage and liability as well as fire, theft, and flood insurance on your rental property are deductible.
- Professional Services. Fees paid to accountants, property managers, or legal counsel related to managing your property are deductible. This is great news when you’re working with professional Philadelphia property managers; our management fees basically pay for themselves once you’ve enjoyed the tax deduction.
Local Tax Considerations in Philadelphia
Philadelphia has specific tax regulations that apply to rental property owners:
- Business Income & Receipts Tax (BIRT)
All rental property owners in Philadelphia are subject to the BIRT. It applies to all income generated from rental activities within the city. The BIRT consists of two components—a Gross Receipts Tax and a Net Income Tax. Rental property owners want to be sure they file these appropriately to avoid penalties.
- Use and Occupancy (U&O) Tax
This tax is levied on the use and occupancy of real estate within Philadelphia. While typically the responsibility of commercial property owners, some residential rental situations may also be subject to this tax depending on your property type and situation.
Record Keeping and Documentation
Accurate record keeping is going to help you manage your rental property taxes effectively. Keep detailed records of all income and expenses related to your property, including receipts, bills, and bank statements. Proper documentation will not only help you maximize your deductions but also serve as a safeguard during audits.
Navigating the complexities of rental property taxes in Philadelphia can be challenging and also time consuming. Consider consulting with a tax professional or accountant who specializes in real estate to ensure all deductions are claimed, and compliance with both federal and local tax laws is maintained.
Understanding the tax obligations and opportunities for deductions as a rental property owner in Philadelphia can significantly impact your bottom line. Make sure you’re leveraging every tax benefit while staying informed, organized, and compliant with all tax laws.
If you’d like some customized support for your rental properties in Philadelphia, we can help. Whether it’s tax deductions or leasing or new investment opportunities, contact us at TCS Management to leverage our expertise in the market.
TCS Management is a full-service property management company headquartered in Philadelphia, Pennsylvania, also serving Cherry Hill, NJ, Wilmington, Delaware, Nashville, Tennessee, Charleston, South Carolina, and Atlanta, Georgia, as well as surrounding areas. We focus on single-family and multifamily residential property management of homes, condos, townhomes, and apartment buildings.
