As we move into December, now is the time to get started on gathering your tax paperwork and consolidating numbers for your 2015 tax return. If you are a property owner or landlord, you will need to take special considerations for your US tax return. This is especially true for US expats, where even the simplest tasks can take longer due to time zone differences and overseas mail.
To help mitigate any taxes you may incur, and to ease your workload at tax filing time, there are a few things you should consider for your rental property now.
Gains and Losses from Rental Income
Rental income is considered investment income to the IRS. The net gain from your rental properties gets taxed at your ordinary tax rate, but the losses can only offset other investment income gains. Because the income is considered investment income, if you are a high income taxpayer you may also face an additional 3.8% tax on your rental income. This is from the Net Investment Income Tax, an added tax tacked on by the Affordable Care Act of 2010.
Pay Any Last Minute Rental Property Expenses Now
Most people use a cash basis for their accounting, especially those with only one or two rental properties. This means that you report income when you receive it, and deduct expenses when they are paid. If you have any expenses that are related to your rental property which can be paid in December (even if they are for the coming year) then you should pay them before the end of the year. These expenses can be deducted on your 2015 tax return, lowering the investment income for the year. Expenses that would be eligible would include property taxes, utilities, regular maintenance payments, landscaping/lawn mowing, homeowner’s association fees, and the like. Payments can be made, but don’t over pay the expenses in order to try and inflate your deductions. This can be seen as falsifying your accounting by the IRS, should an audit be conducted on your return.
Rental Properties in LLC or S-Corp
You will need to issue 1099-Misc forms to any person or business you paid $600 or more to during the year. You will also need to report to your tenants all the rents you received from them during the year, also on a 1099-Misc. These forms will be reconciled at the IRS with your tax return to verify the amounts. In order to get a head start (if you have not done so already), get an EIN (Employer Identification Number) or Social Security Number from everyone you need to issue a 1099 form to. If you are not an LLC or S-Corporation, you don’t have a 1099 filing requirement.
Gather Your Paperwork
Expenses paid in January are easier to recall and document now, while it is still “fresh” in your mind. Since expats have a longer filing deadline, the time lapse between when an expense was paid and when you need to document it on your tax return is longer as well. Don’t rely on your online bank account or credit card statements, as most banks only show 13 months of details.
Foreign Property Rentals
If your rental property is in a foreign country, there are some considerations you should make. If your resident country’s tax year is different than that of the US, you may need to adjust how to account for income and expenses. Some items may be deductible in the US that are not deductible on your foreign taxes, and vice versa. For example, mortgage interest is a deductible expense in the US, but is not deductible in some other countries. Because of this foreign banks may not send you a report of the mortgage interest paid during the year. It would be up to you to document and figure your mortgage interest paid (not your total mortgage payment, as this includes interest + principal repayment). Many foreign banks can calculate this for you, but you may need to make a special request.
If you hold your foreign property in a trust or other organized business structure, there will be additional forms required to be filed to satisfy the IRS. If you think you will need to file these special forms, you should contact your tax advisor to find out what you need to provide so that these forms will be filled out correctly.
Overall, proper planning and document collecting now can save you lots of time and money when you prepare your return in 2016.
Greenback Can Help with Your US Expat Tax Return!