Rental Income and Everything You Need to Know About It

Posted on May 24, 2022
Milica
0

According to the IRS – rental income represents “any payment you receive for the use or occupation of property”. But, have you wondered why it’s often called a tax shelter?

We are here to guide you through it. In this article, you will find everything you need to know about rental income and how is it taxed.

What “Rental Income” Includes?

Rental income isn’t only the money you receive from the rent. Here’s the list of everything considered as that kind of income according to the IRS:

Rent payments and rent you received in advance.
Security deposits you haven’t returned.
Services received instead of rent.
Canceled lease

How Much Tax Will You Pay?

The tax for your rental income is the same tax you pay from your general income. Furthermore, your tax bracket is the same as a landlord as it would be if you’re just earning the same amount of money in a different way. However, if you wish to calculate your tax, you need to add up all the things considered as rental income, mentioned above.

How to Report Your Rental Income?

There are three forms you use to report it:

Form 1040 – Individual income tax return
Form 1040-SR – Tax return for seniors
Schedule E – Supplemental income and loss

Mostly, you’ll report rental income for the tax year that you received that income. Additionally, in case you own more than three properties that you rent – you can use Schedule E for each one. Important to remember here is – always provide the IRS with accurate and complete information.

So you need to keep records for your property. Those records include checks, receipts, and all your financial statements. If you have a property manager, they will provide you with a yearly financial statement for incomes and losses. You can use this statement as a valid document for tax purposes.

Keeping accurate records allows you to claim every deduction you can. Also, paying penalties and creating a fallout with the IRS is something you want to avoid. Always have in mind, that as a business owner, you can get audited too. Having clean and well-kept books will show the IRS you are a professional at what you do.

More Useful Info on Rental Income

Let’s talk about what you can deduct from your taxes regarding rental income. Deductibles for rental income include:

Mortgage interest and property tax
Expenses for repairs and/or utilities
Homeowners association, insurance, and property fees
Marketing
Cleaning and maintenance

But, you need to know that not all expenses from your rental property can be calculated as deductibles. For example, improvements and renovations. However, you can recover these costs through depreciation. IRS Publication 946 contains a very detailed explanation of how depreciation works. Here are all the improvements that fall under depreciation according to the IRS:

Structural additions and renovations
Insulation, heating, and air conditioning
Furniture
Flooring
Landscaping

If you’re unsure about whether or not an expense is deductible, we recommend – talking to a professional. A tax professional can help you understand deductions for your rental income.

To Sum Up

As you might have figured out so far – there are many advantages when you own a rental property. Of course, benefits and deductions are the main ones. Important to realize here is that the tax law is extremely friendly to real estate investors.

However, if you still have questions – Your Part Time Accountant is here to help!