Rental real estate, if managed well, can provide income and tax breaks. But watch out. Problems can arise even with good tenants. Knowing the sources of trouble can help you steer clear of unnecessary problems. Here are six mistakes landlords can make:
- Inadequate or illegal screening. Don’t let a fear of empty units cause you to shortcut the screening process. Before accepting renters, check their credit and rental history, verify income, and contact personal references.
Also, keep in mind that federal law allows landlords to screen potential tenants, but not on the basis of race, religion, sex, ethnicity, or disability. Some states and localities also prohibit discrimination based on marital status, children, age, and sexual orientation. To avoid discrimination claims, find out the laws in your area and treat all prospective renters with the same respect.
- Not putting everything in writing. Obviously, you need a written agreement reviewed by a real estate attorney. Be sure it includes the issues within the law that are important to you. Examples: Who pays for utilities? Are pets and sub-lets allowed? What is the fee charged for late rent?
- Mishandling security deposits. Check for specific state laws concerning security deposits. In many states, these laws are strict, and failing to follow them may result in costly damages.
- Being unresponsive or hostile. Some tenants can be demanding, but it’s good policy to always respond and fix problems. Keep a record of tenants’ requests and the repairs made. Failing to take care of problems can increase aggravation. It can also cause tenants to call local authorities, such as the health inspector, or pursue their legal remedies, which in most states, are tenant-friendly.
- Not reacting promptly when rent doesn’t come in. Call or notify tenants after a few days if they don’t pay the rent. Depending on the laws in your state, follow the procedures allowed as soon as possible. When it comes to getting the money you are owed and keeping rental units filled, it is critical to act quickly when tenants don’t pay the rent.
- Not understanding the tax laws related to rental property. Owning rental real estate can result in some valuable tax breaks. For example, if you qualify, you may be able to use losses to offset other highly-taxed income, such as salary and dividends. When you sell the property, you may be able to defer or reduce the tax owed on the capital gain. However, the rules involving rental real estate are complex. Landlords often have many questions including:
- What expenses can I deduct and when can I claim them?
- How is depreciation calculated?
- What is the best way to sell the property for tax purposes? Do I qualify for a Section 1031 Exchange?
- Am I involved in a passive real estate activity?
- Do I have to pay tax on security deposits?
Contact us for help answering these and other tax questions related to rental real estate. We can’t help you deal with barking dogs and late-night complaints from tenants, but we can help ensure you get all the tax breaks you deserve.