Rental income is subject to taxation, just like any other source of income. In this article, we will break down the basics of rental income taxation. If you own a rental property or are considering becoming a landlord, it’s important to understand how rental income is taxed.
What is Rental Income?
Rental income is the money you earn from renting out a property you own. It can come from various types of properties, such as houses, apartments, commercial spaces, or vacation rentals. This income includes not only the monthly rent but also any additional fees or services you provide, such as parking fees or laundry facilities.
When it comes to rental income, the IRS considers it as taxable income. This means you must report it on your annual tax return. Rental income is generally taxed at your ordinary income tax rate, which depends on your total income for the year.
Deductible Expenses
The good news is that you can deduct certain expenses related to your rental property, which can help reduce your overall tax liability. Some common deductible expenses include:
You can deduct the interest paid on your rental property mortgage.
The property taxes you pay on your rental property can also be deducted.
Expenses for repairs, maintenance, and upkeep of the rental property are deductible.
The premiums you pay for insurance coverage on your rental property can be deducted.
You can deduct the cost of the property over a certain period of time through depreciation.
If you hire a property management company to handle your rental, their fees can be deducted.
Utilities: If you pay for utilities on behalf of your tenants, you may be able to deduct these expenses.
Reporting Rental Income
To report your rental income, you will need to fill out Schedule E (Supplemental Income and Loss) along with your annual tax return. On this form, you will list your rental income and deductible expenses. The net income or loss from your rental activity will then be transferred to your main tax return.
Passive Activity Losses
It’s important to note that rental activities are generally considered passive activities for tax purposes. This means that any losses you incur from your rental property may be subject to certain limitations. However, if you actively participate in the rental activity and meet specific criteria, you may be able to deduct up to $25,000 in losses.
Record Keeping
Keeping accurate records of your rental income and expenses is crucial for tax purposes. It’s recommended to maintain receipts, invoices, and any other relevant documents that support your income and expenses. This will help you during tax season and if you ever get audited by the IRS.
In conclusion, rental income is subject to taxation, but you can offset your tax liability by deducting eligible expenses. By understanding the basics of rental income taxation and seeking professional advice when needed, you can navigate the tax obligations associated with being a landlord more effectively.