If you have clients who own rental properties, you may want to remind them of the importance of tracking their expenses. As you know, they can deduct all eligible expenses from their rental income, and if they end up at a loss, they may even be able to claim that against their other income.
Imagine your client collects $12,000 in rent for the year but spends $3,000 in qualifying expenses like lawn maintenance and repairs. For this year, their taxable rental income is $9,000. Now, imagine that the next year your client makes significant upgrades to the property. They still collect $12,000 in rental income but end up spending $15,000 in eligible expenses. They have a $3,000 loss and can claim this loss against their other income. That includes both employment and self-employment income.
The exception is in cases where your client is charging less than fair market value for the rental. To continue with the above example, imagine your client is renting out the property to their adult child. The average rent for similar properties in the same area is $2,000 per month. As your client is only charging $1,000 per month, the rent is below fair market value so they can’t claim the loss.
Additionally, if your clients use accrual-basis accounting, they can also claim losses related to unpaid rent. Accrual accounting is when you count revenue at the time you agree to the deal, rather than waiting until you have the funds in hand. Say your client uses the accrual method and reports the rent for December 2016 as income on their 2016 return. But the tenant never pays the rent for that month. In this situation, your client can claim that amount as a loss on their 2017 tax return. Clearly, this doesn’t apply in cases where your clients use cash-basis accounting because they don’t count the rent until they have it.
When you’re an accountant, your clients rely on you for quality advice. That means staying on top of the credits and deductions that apply in their unique industries. If you represent a lot of landlords, you may even want to invest in real estate accounting software to help you.