As a landlord or real estate investor, you must declare rental income as taxable income when you rent property to others. The IRS offers tax guidelines for landlords reporting rental income, as well as a list of permissible tax deductions available to rental property owners. Read on to learn more landlord tax tips.
What Is Considered Rental Income?
All amounts received as rent from residential use of your properties is included in rental income. All rent income from all of your properties must be included.
Even if the advance rent is intended to cover rent in a future year, it must be declared on the current year’s return. If you had a 12-month lease that started in June 2021 and your tenant paid you first and last month’s rent in advance, you would report the rent for June 2021 (first month’s rent) and May 2022 (last month’s rent) as rental revenue generated in 2021.
When you initially receive a security deposit from a tenant, the money is not included in your tax return. You should include the amount of the security deposit you maintained in your reported income that year only if you keep all or a portion of the security deposit money during the year as part of the lease terms.
Late rent payments, pet fees, parking spots, and early lease cancellation fees are all items that must be included in your total rental income for the year.
The fair market value of services received as rent, rather than money, must be included in your rental revenue. If your tenant is a painter, for example, he or she offers to paint your rental home instead of paying rent for two months. If you accept the offer, deduct the amount the tenant would have paid for two months’ rent from your rental income.
Passive Investor vs. Professional
Rental losses are not passive if you spend the most of your working hours in the real estate industry as a real estate professional. This means that all losses, whether passive or nonpassive, are entirely deductible. This is a tax benefit that a real estate professional enjoys.
If it’s a sideline investment—which means it’s a passive real estate investment—your losses are passive, and you may be able to deduct up to $25,000 against your rental income. If your modified adjusted gross income (MAGI) is between $100,000 and $150,000, the deduction is phased down. Losses of more than $25,000 are allowed to be carried forward to the next year.
Passive income real estate is a strategy that allows an investor to generate revenue without having to actively participate. The phrase “passive income” is a misnomer because the amount of action and commitment required varies depending on the investment type. Rental properties and earnings from investment portfolios are two frequent examples of real estate income.
A taxpayer may be able to avoid certain taxes such as self-employment tax by being classified as a real estate professional. Income arising from “rentals from real estate” is excluded from the definition of self-employment income for the purpose of the self-employment tax.
A real estate professional—for tax purposes—is someone who devotes more than half of his or her working hours in the rental sector, according to the Internal Revenue Service (IRS). Property development, construction, purchase, and management are all examples of this. To be considered a professional, you must work on your real estate rental properties for more than 750 hours each year.
Repairs vs Improvements
Owners of rental properties may believe that anything they do on their property is tax-deductible. According to the IRS, this is not the case. A repair keeps your rental property in good working order and is a tax deductible real estate expense when paid for throughout the year. Painting, repairing a water leak, and replacing a malfunctioning light switch are among what are considered to be repairs. Improvements, on the other hand, increase the value of your home and are not tax-deductible when paid for.
You must recoup the cost of modifications by depreciating the cost over the expected life of your property. A new roof, patio, or garage are examples of improvements. From a tax standpoint, you should undertake repairs as soon as problems develop rather than waiting until they become severe enough to necessitate renovations.
Mortgage Interest vs Principal Payments
When you pay for a mortgage, the costs are not deductible. Commissions and appraisals are examples of these.
Not all of your mortgage payments are tax deductible after you start making them. This money is not deductible because a portion of each installment goes toward paying down the principal. The amount you pay in interest is tax deductible.
Every year, your mortgage company will issue you an IRS Form 1098, which displays how much interest you’ve paid over the course of the year. This is a deductible expense. Your mortgage company should also notify you if a portion of your payment goes into an escrow account to cover taxes and insurance.
The interest on a home mortgage is reported on Schedule A of the 1040 tax form. Schedule E is used to report mortgage interest paid on rental properties that are deductible.
Insurance, Lawn Care, and Local Taxes Deductions
The IRS has given the following list of landlord deductions to assist investors in reducing their tax burden at tax time. Keep meticulous records of the following tax deductions available to landlords as you begin a new year or prepare your taxes for the previous year. Maintaining accurate records of all your expenses is the best way to ensure that you are getting the most out of your tax deductions.
1) Imposition of taxes
In general, landlords may be eligible to offset property taxes (if your property is mortgage-free), business-related wage taxes, permit/inspection fees, state, county, and local taxes, and personal property tax if they are relevant to their rental operation.
The key distinction between maintenance and repair charges is that you are performing routine and preventive services to keep your property in good shape.
3) Insurance Coverage
Did you know that several types of insurance premiums you’ve acquired for your rental property can be deducted? Landlords can often deduct some of the expenditures of insurance coverage, from flood insurance to landlord liability insurance. Is real estate insurance tax-deductible? Although homeowners insurance is not usually deductible, there are other expenses that you can deduct if you keep track of your spending and itemize your taxes each year.
If you have any questions or concerns about the tax benefits offered to rental property owners, speak with your real estate professional or an IRS professional. You may also speak to TFX—an online-only service that provides best in class tax advice, planning, and compliance services for individuals, partnerships, corporations, trusts, and estates, subject to the US tax system, wherever they may live or operate in the world.