Rental Income Tax: A Guide for First-Time Landlords
Renting out a property requires record-keeping and proper tax management. Rental income tax differs from other taxes because it is an investment and a business. By understanding your taxes, you will avoid unnecessary headaches when filing your paperwork.
Rental Income Tax | A Quick Overview
Basics of Rental Income Tax
Is rental income taxable? Yes. You must pay your rental income tax when you are a landlord. The exact amount of taxes you must pay depends on the situation and the location where you live.
Do you have to report rental income from a family member? This depends on the situation. Generally, you will need to report the income from a family member on your taxes. If your family member is a dependent and lives in your home, the funds are not considered rental income.
When you rent out to a tenant, you will need to report your income to the government. Calculating your taxes is your responsibility as a landlord. The exact amount you must pay depends on your profits. It doesn’t depend on the exact rent you receive for the property.
Calculating Rental Property Taxes
A rental property tax calculator helps you define your tax responsibilities as a landlord. The calculator will give you a basic idea of the taxes based on your rental income and the tax rate in your state. Property taxes vary by state and locality.
Next, you will need to calculate the actual rental income. Rental income is the money you make from renting out a property. You can subtract certain items from your income. For example, from your income you can subtract the cost of preparing a property to rent. A rental property tax calculator can help you with the calculations.
How to File Rental Income on Taxes
The process of filing your rental income is like that for any other investment. You will use a Schedule E to report your income and losses from the rental property. The Schedule E also includes the expenses associated with renting out a property.
When calculating expenses, you must differentiate between repairs and improvements. A repair is the cost of painting, changing the locks, or fixing something a tenant broke on the property. You can directly subtract the cost of a repair as part of your expenses.
Improvements are changes you make to add value to the property. For example, if you renovate the kitchen, you are improving the property. This is not a repair unless a renovation is necessary due to damage from a previous tenant. An improvement is deducted from your taxes as a depreciating asset. That means you deduct the cost over several years instead of within the same year.
Expenses on your property include the cost of repairs, advertising, and other costs required for the rental process. It may also include the utilities on the rental space.
Income is the money you receive from your tenants and any services you may receive as part of an agreement with your tenants. If your tenants pay the first and last months up front, you must report the last month’s rent during the year in which you received the money. A security deposit is not taxable because a landlord returns the money to the tenant when the tenant moves.
Deductions on Your Property
When you report your rental income, you can deduct some of your costs. The obvious expenses, like repairs, are tax deductions for landlords. Other expenses also qualify for a deduction.
You can deduct a portion of your gas costs associated with renting out a property. If you must drive to the property, you can report on your taxes the number of miles you traveled. Use the standard mileage calculation to determine the amount you can save.
Costs associated with maintenance are part of your deductions. Maintenance costs may include pest control, repairs to the property, property management services, and supplies used during a repair. Subtract the exact costs of the services as an expense on your taxes.
Fees and taxes are also deductible on your federal taxes. You can deduct professional fees, like a lawyer’s fee, from your taxes. In addition, you can deduct the condo fees or homeowner association fees when you rent out a condo or apartment. Local taxes are deductible on your federal taxes when you rent out a property.
The last category of deductions on your property is the cost of utilities. When you pay for trash collection, water, or other utilities, you can deduct the amount. When your tenants pay for the utilities, no deductions are available to you.
Renting out a property means you must pay rental income tax. The amount you pay depends on the income and expenses associated with the property. By keeping track of your expenses, you will save on your taxes. The key is ensuring that you understand the different ways to deduct expenses. Pay attention to repairs and improvements to avoid accidentally reporting the information incorrectly.
Have you filed your rental income tax lately? Let us know in the comments section below.