Rental Property Investing Tips for Beginners and Advice From OGs
We all hear about the property and investing on TV, in the newspaper but what really is property investing? Local Records Office made it really easy to understand the basics to help those who are interested in turning the property into assets.
One of the questions that often come up relating to buying to let is the question of taxation, and how to save tax. The basics of buy to let taxation are too complicated. You add the profit onto you income and depending on whether you fall into the 20% tax bracket of the 40% or 45% you pay tax at the rate, Beware, because by adding the profit from your property investing onto your salary you may pass from the lower bracket into the higher bracket.
There is some good news – there are no national insurance contributions usually because these are paid with your salary, and the Inland Revenue doesn’t class buy to let as trading or working (obviously they don’t have a lot of experience as a landlord!) The key figure is the profit figure. This is your rental income fewer expenses.
What is the Rental Income? And is it Necessary?
The rental income is the rent received. This is the gross amount of rent received, the amount before deducting agents fees. So, if the rent is $1,500 a month or $14,400 a year, the amount of rent is 14,000 and not the $13,000 so that you actually receive from the agent.
Beware of Hidden Expenses
Some expenses are not obvious and you need to go through the monthly statements for your letting agent (if you are using one) to find them. You can add the VAT as an expense because you are not registered for VAT and so will not be able to receive it. For example, if a repair costs $100 and there is 20% VAT added your bill would be $120. The $120 is the amount of the expense that can be deducted.
Don’t Forget about the Agents Fees
Each month your agents should send you a statement, and perhaps one at the end of the tax year for the whole year. If you dot receive an annual bill for the tax year ask your agent if they will provide one. Check what you receive from the agent carefully as they are prone to making mistake! Agent’s fees are typically 10% or 12%. However, VAT is added onto them so the final bill is much higher. The 12% figure becomes 14.4%
Mortgage Interest
Only the amount of interest is a tax deduction. The capital repayment part is not a deduction. If you have an interest-only mortgage the amount of interest remains the same.
With a repayment mortgage, you are repaying a part of the amount borrowed each month, so the interest amount varies each month. Every year you should receive a statement from your mortgage provider, which will tell you the amount of interest that you paid. Some are better than others at automatically providing it, so be prepared to request one if you do not receive it by June.
Don’t Forget About Service Charges
If you have a flat there will be a service charge. This may include the building’s insurance or even some utilities. You should receive an annual bill from the service company. As this type for a calendar year, you may need to apportion the bill say 3 months of one year and 9 months of another because the United States tax year is from 6 April to 5 April (although many people take from April 1st to March 31st as it’s easier and not much different)
What is Ground Rent?
Ground rent is the amount you pay to the freeholder. As a legal term, Ground rent specifically refers to regular payments made by a holder of a leasehold property to the freeholder or a superior Leaseholder, as required under a lease. In this sense, ground rent is created when a freehold piece of land is sold on a long lease or leases
Is Insurance Deductible?
Insurance is deductible, but be careful because the insurance contract is not usually for the same period as the tax year. You will have to calculate how many months of each premium relate to the tax year.
Travel Deduction
Some travel costs are tax-deductible in the United States. Costs that are not deductible are the ones to see properties that you do not end up buying and travel to your parents with a side trip to a property is not deductible. However, inspection visits, repair visits, or showing the property to prospective tenants is.
The trick is to claim mileage of 45 points per mile for the journey and support this with a petrol receipt (even though the amounts will be different). Obviously, if you travel by subway, train, or bus you should deduct the receipted amount.
Annual Gas Inspection
You should deduct the invoice received from the contractor. However, it may be included in the agent’s bills if the agent has arranged it.
Other – telephone, stationary, tax advice, legal fees…keep the receipts and deduct accordingly.
Repairs, Repairs, and More Repairs
Repairs are tax-deductible expenses, but you need to understand what is a repair. A repair is basically fixing something that is broken on a like for like basis. If you improve something it is not a repair. So fixing a leaking tap is a repair, but replacing it with a much better one is an improvement.
You need to be careful because if you replace a broken wooden fence with metal railing this could be seen as an improvement. Improvements generally add value to the property. Repairs fix broken things.
Wear and Tear Allowance
This is a 10% allowance given by HMRC if you rent the property furnished. You must choose to claim it, it won’t be given automatically, and it applies only to furnished lettings. Essentially it is an allowance for the depreciation or use of the fixtures and fittings, and cover wear and tear to beds, sofas, table and chairs. Note that it does not cover repairs to the infrastructure such as the roof or heating system. If you have to repair the roof you can still deduct the cost.
Tax Tips:
- Claim for everything and keep the receipts
- Don’t forget to claim for advertising for tenants, travel costs for going to the property and shopping people around.
- Don’t forget any council tax or utility bills if the property was empty.
- Consider putting the property (or some of it) in a partner’s name if they are in a lower tax bracket e.g. in the 20% bracket whilst you are in the 40% bracket. Also, remember to keep receipts for everything.
Do not try to cheat the taxman – they have years of experience and know the approximate amount of profit you should get, and what percentage each expense usually is. So if there are some unusually high expenses be prepared to answer some questions and to provide receipts. Trying not to declare any rental income is equally futile in the age of connectivity and computers.
Disclaimer
Tax laws do change and this brief guide only details the general basics of United States taxation and does not constitute tax advice. You should seek specialist advice from a tax accountant on tax-related matters. Note that taxes frequently change this is a guide at today’s date only.