Some of the Best 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. Even though they may not be at the forefront of a landlord’s thoughts, there are some aspects of rental income and taxes that they should be aware of.

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 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 reported income, the IRS’s marginal rate for the tax year 2023 is as follows:

37% | Individual: $578,125 or more; Married/Joint: $693,750 or more
35% | Individual: $231,250 to $578,125; Married/Joint: $462,500 to $693,759
32% | Individual: $182,100 to $231,250; Married/Joint: $364,200 to $462,500
24% | Individual: $95,375 to $182,100; Married/Joint: $190,750 to $364,200
22% | Individual: $44,725 to $95,375; Married/Joint: $89,450 to $190,750
12% | Individual: $11,000 to $44,725; Married/Joint: $22,000 to $89,450
10% | 0 to $11,000 for individuals and 0 to $22,000 for couples

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

Can Rental Income Be Earned?

Your rental income is not regarded as earned income in several situations. It is therefore 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 for personal and rental purposes, divide your total expenses by the number of days you spent using it for each. The way you submit company and personal deductions separately is comparable to this.

What Rental 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 might be reduced by expenses like routine and essential 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.

FAQs about Rental Income and Taxes

Are you paying taxes on your rental income?

Yes. Your tax return needs to include information about your rental income. You can frequently deduct business-related expenses from your rental revenue.

Does my rental income from another state require taxation?

Even if you continue to reside in another state, you must submit a tax return in the state where your property is located. You could have to submit a 1040 or another kind of tax return. Keep current with any local and state tax regulations that may apply to your properties.

How much of my rental revenue is taxed?

Your tax rate depends on the tax bracket depending on your annual income because rental income is taxed similarly to other forms of income. Tax rates, deductions, and other factors will change depending on the state and other local laws.

How can I get my rental income out of paying taxes?

When completing your tax return, you can take advantage of a variety of deductions to reduce your financial burden. Expenses paid by your tenants, material prices, and regular and essential property maintenance charges are a few examples of deductions you might be able to claim on your tax return.

Get Help From Your Part Time Accountant

Take advantage of as many tax deductions as you can by working with Your Part Time Accountant, because we specialize in rental income and taxes. To increase your rental property revenue, contact us right away!