Filing taxes can be a complex process, and when you add real estate investments into the mix, the whole undertaking may suddenly seem overwhelming. There are many benefits to investing in real estate—tax deductions and credits included—but first, it’s important to understand how you can prepare to most efficiently file your taxes.
A close friend of mine is a property manager. He has an ex-pat client who still owns a rental property in the United States. The client lives in Spain, where she is considered a full-time resident. Let’s call her Sarah.
Sarah has a U.S. tax identification number. Last year, she reported her income under a single-member, U.S.-licensed LLC. Considering she’s the property manager, my friend had to do significant research to find out which form was correct for Sarah to fill out.
The conclusion? Form 1042-S would be the best option to report rental income subject to withholding for a client who lives in a foreign country.
My friend came to find out that, for tax purposes, the IRS disregards LLCs that are designated “single-member.” This meant rental income in these scenarios is taxed on the individual’s personal tax return. Sarah should have filled out Form W-8ECI (W-9 for U.S. citizens), which is appropriate for U.S. property owners with a foreign address.
The moral of the story is that investing in real estate can easily complicate your tax-filing process—especially if you work as a property manager or help others manage their investment properties. Issues may arise of which you weren’t previously aware. So, here are some of the main considerations you should keep in mind when planning ahead for tax time in order to reduce your taxes and minimize your risk of audit.
Real Estate Taxes: Do This Right Away When Starting Out as an Investor
Verify vendor and contractor information
Touch base with each vendor or contractor you’ve worked with throughout the year. Make sure you have the correct federal tax I.D. number and mailing address.
If you are a property manager, this includes reaching out to each of your property owners.
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