Five Excellent Facts About Rental Income and Taxes

For landlords, the property management business can be quite lucrative. Interviewing prospective tenants, managing current tenants, and maintaining property quality are just a few of the numerous moving elements in this fast-paced sector. Although income tax and deductions for rental properties may not be at the top of every landlord’s attention, they are nonetheless important topics to understand.

If you manage rental properties and receive rental income, you should be aware of rental income tax and possible tax deductions.

What Is Rental Income, Exactly?

The term “rental revenue” is inclusive of the following four categories:

The sums spent to end a lease
Rent in advance
Costs covered by a renter
Security remittances

First, money from a canceled lease is regarded as rental income. For the tax year in which you got it, you must disclose this. Rental income is defined as advance rent paid during the tax year in which you receive it. Tenant-paid expenses are a sort of rental revenue as well, although they might qualify for a tax deduction.

Security deposits consist of numerous elements:

Rental income does not include security deposits that will be refunded to your renter at the end of the lease.
You must report the amount of income you kept as income for the tax year if your tenant moved out or broke the contract early.
If you withheld some or all of the security deposit from the renter to make repairs to the damaged property, you must deduct the cost of the repairs from your income. All before including the amount you kept as rental income.
Advance rent is the security deposit applied to your tenant’s final month of the lease. It might be regarded as rental revenue once you receive the money.

How Much Tax on Rental Income Do You Pay?

The reporting and taxation of rental income are the same as for other types of income. As a result, your tax bracket has a significant impact on how much of your rental revenue is taxed.

Based on the income reported, the IRS’s marginal rate for the 2022 tax year is broken down as follows:

37% | Individual $539,900 and above; Married/Joint $647,850 and up

35% | Individual up to $215,950; Married/Joint up to $431,900

32% | $170,050 and higher (individual) (individual) up to $340,100 (married/joint)

24% | $89,075 or more of those who are single

22% | $83,550 or more of those who are married or joint

12% | $10,275 or more of those who are single earn $10,275 or more

10% | Individuals under $10,275; married couples under $20,550

Remember that you must submit a Schedule E (Form 1040) for each rental property you own if you own more than three.

How Are Taxes on Rental Income Calculated?

Add together all of the rent you’ve received to determine your rental income tax. Include any costs associated with your property. The fair market worth of any goods or services you obtained should also be considered. So, don’t include security deposits in your gross revenue total if you intend to return them at the end of the lease.

The costs associated with owning the property, such as taxes, depreciation, insurance, upkeep, and advertising, are then added. The last step is to deduct your expenses from your gross income. You must pay taxes on this sum.

Three outcomes are possible:

This is the portion of your rental income that is taxable if it has a value greater than 0.
This is the amount you can deduct from other income sources, such as lost business revenue, for a sum less than zero.
Your income is not affected by a total of zero.

Do Rental Payments Count as Earned Income?

There are various circumstances in which your rental income is exempt from taxation. If you utilize a dwelling unit as your residence and rent it out for fewer than 15 days, you are exempt from reporting rental revenue and making any necessary deductions.

If you use your home both as a rental and as a personal residence, divide your total expenses by the number of days you utilized it for each use. The way you submit company and personal deductions separately is comparable to this.

What Income Is Tax Deductible?

You can write off the following costs against your rental income:

Operational Expenses for Depreciation
Repair Prices
Various deductions can be used to lower your tax burden. Your tax liability, or the amount you owe in taxes, can be decreased by costs like routine and necessary expenses.
The regular payments you make to maintain your property are included in your normal expenses. Advertising, insurance, maintenance expenditures, and electricity bills are examples of necessary expenses.

Deductibles are allowed for upkeep, material, repair, and supply costs. If the costs were incurred by a renter and were deductible rental costs, you can also deduct them. The price of your rental property’s improvements, however, cannot be written off.

Engage a Professional

Landlords may be able to save money by lowering their tax obligations through potential deductions on rental income. So, work with a qualified accountant to make sure you benefit from as many tax breaks as you can. To increase your rental property revenue, don’t be afraid to ask for professional help.