Good ole Benny F. is credited with the quote “Nothing is sure in life except death and taxes.” He may be right, but the quote puts tax season in a negative light. There are parts of the tax code that I don’t like, but since I’ve been a landlord, I’ve actually look forward to tax season.
Last tax season, I didn’t really do anything to make my taxes more efficient. I simply let the depreciation from my first property increase my tax return. I had a few other things happen in 2012 (my daughter was born and a mortgage refi), but nothing really out of the ordinary. However, I still received nearly $2,800 back from the Feds. This $2,800 tells me a few things:
1) I was a fool and let the government have their way with my money throughout the year
2) I probably have more ways to cut back my taxes
3) Owning real estate really helps reduce taxes
With those pieces of information, I decided to increase my real estate holdings in 2013. I purchased UFUO#2 and Duplex/UFUO#3. I put about $8,000 into UFUO#2 rehabbing the place (resurrecting UFUO#2 from the brink of condemnation). I haven’t done anything with UFUO#3 yet, but the property was fully rented when I purchased it, the tenants pay on time, they sometimes call about burned popcorn, but overall, they’re good residents.
The changes I made in 2013 were:
1) Reduce my withholding from my W2 day job (+$50/paycheck)
2) Save every freaking receipt to itemize every last expense (after compiling all the receipts, I realized I need to do better next year)
3) Track every mile I drive for HBS for the $0.55/mile back from the IRS (about 4,000 miles in 2013)
4) Make a plan for 2014 and adjust the budget for 2014 so I can come out even further ahead at tax time in 2015 (done, almost ready to execute)
My taxes are not complete yet, but (knock on wood) I’m feeling good about them. I have more depreciation this year (~$2,400 or so v. $181 last year) and one of my units was vacant for 11 out of 12 months last year (UFUO#2, all while the rehab was happening). I also realized that $5 if $5 and shouldn’t be left on the table, especially for the Feds to keep. I had $5 remaining for my federal energy efficiency tax credit, so I decided to pull the ‘paid’ receipts to get that remaining $5.
Moving forward to 2014, I need to fully fund a traditional IRA in addition to an HSA. Both are tax advantaged accounts, meaning my contributions will reduce my earnings for the year, which will further increase my tax return in 2015. I need to do a better job tracking each and every receipt (they have to stop going through the washing machine!). Lastly, I need to make sure that all items bought for business are bought on the business account. There is a book I want to read regarding real estate investment (the closest library that has the book is about 1,000 miles away). I was going to buy the book personally, but my wife reminded me that it is now a business expense rather than a personal expense.
Here’s to tax season 2015!