Tax benefits are one of the biggest reasons that buying a duplex is a good idea. That’s at least probably what you hear the most about, anyway. “It’s a tax shelter,” “You’ll save so much money on taxes,” “You can depreciate your house while it actually goes up in value…” And yes, the tax benefits of owning a duplex are pretty nice, especially that whole depreciation thing. However, the catch here is that your taxes get a LOT harder to do, once you own a duplex. I went from being an apartment dweller who filed a simple 1040EZ to having a bunch of (fairly) detailed schedules to fill out every year. And while the schedules themselves aren’t actually that hard, once you figure out what you’re doing (or find someone to pay to figure them out for you), the biggest part is something that only you can do: Keeping track of your expenses. Well. In an organized fashion. Preferably throughout the year (which, as a person who pays nearly all of her bills online, I don’t do. Around tax season is when I generally open and read all of my mail from the previous year, for the sake of tallying up all of my deductible business expenses).
However, if you’re decent at basic math and organization, and once you get the hang of it, it’s really not so bad. Just a lot of busywork. The first year that I bought my duplex, I had no idea what I was doing, and simply kept track of every expense that I thought could possibly, tangentially be related to the rental, and paid a tax preparer $75 to do my taxes for me. Because I had everything organized by month, rather than by type of expense, he lumped most of my expenses into the “repairs” category, and told me to keep better track of things next year. Every year after that, I’ve simply read up on any new laws online (the IRS website has all the information you really need, after all, it’s straight from the horse’s mouth), and copied the basic template of what he did that first year.
Now, I am in now way shape or form a tax professional, official giver of advice, mentor, person to emulate, etc. However, I think that I do a fine job on my taxes, and you can too, so I’m going to tell you how I do mine. Do as you wish with yours, and if you want to be on the safe side, bring them in to your local H and R block (although an independent tax preparer may be cheaper).
FORMS THAT I FILL OUT FOR MY FEDERAL TAXES
- 1040 (not the EZ, those days are over)
- Schedule A — Itemized Deductions (for my personal deductions, e.g. charitable donations, medical expenses, etc.)
- Schedule E — Supplemental Income and Loss (this is where I put all of my duplex expenses, including repairs, utilities, mileage, etc.)
- Form 4562 — Depreciation and Amortization (definitely the trickiest of the four; it’s how you declare a loss on your aging rental property, even though it’s actually appreciating in value.)
So yes, it’s only four forms. For me, anyway, other people’s individual circumstances may require something different than mine. At any rate, you’ll also need the instruction sheets for each of the above four forms:
INSTRUCTIONS FOR DUPLEX-RELATED TAX FORMS
Sounds easy enough, right? I’ve just downloaded all of the forms and instructions, eight in all, and have them sitting (admittedly rather dauntingly) on my desktop. I’ve also dug out last year’s taxes to use as a guide. I’ll have to take a quick skim over the IRS website just in case there’s something new this year that affects me, and then I’ll be set. Well, set to get started, anyway…