Owning investment property is a perfect way to build wealth. However, it comes with many tax implications for landlords as well. As a landlord, you should be familiar with how you are taxed for income generated on rental properties. Keep reading below as we share more details on how rental income is taxed and how landlords can navigate this and benefit from it in return.
How is Rental Income Taxed?
When you collect rent from tenants, that money is considered taxable income by the IRS and state tax authorities. You must report all rental income you receive during the tax year and pay appropriate taxes on it. This income is typically reported on Schedule E of your Form 1040.
There are two main components for calculating taxes on rental income:
Gross Rental Income
Any income you generate from renting out your property is considered taxable. This includes not just the monthly rent checks but could also include other fees like security deposits you keep, key fees, or move-in fees. The total cash and value you collect for allowing tenants to use your property is your gross rental income that must be reported.
Expenses & Deductions
Once your gross rental income is determined, you calculate your net taxable rental income by factoring in allowable deductions and expenses. Allowable expenses typically include mortgage interest, property repairs, management fees, utilities, property taxes, and depreciation. By deducting these expenses, you can lower your net taxable rental income and lower your tax burden. The key is to keep detailed records of all your rental income sources and expenses. This allows you to calculate net rental income accurately and ensure you get all the deductions you are entitled to. The next section will provide more details on allowable rental property tax deductions.
Common Deductions For Landlords
One of the best parts of owning investment property is getting to take advantage of tax deductions to reduce your rental income tax burden. When you operate your rental property like a business, you open up deductions for rental expenses. Let’s take a look at some of the most common and valuable tax deductions landlords should know.
Property Taxes
Any state, local, or real estate taxes you pay on your rental property can be deducted from your federal return. This includes property tax bills as well as specialty district taxes. Be sure to deduct the portion of your property tax that applies to the rental portion if you live in part of the property.
Repairs & Maintenance
Expenses for any repairs and routine maintenance done on your rental property can be deducted in the year paid. This includes things like painting, appliance repairs, handyman services, lawn care, pest control, and snow removal. Just ensure the expenses are reasonably necessary rental expenses, not upgrades or improvements.
Depreciation
One of the largest deductions landlords can take is depreciation on their rental property. This allows you to deduct a portion of your rental property value each year to account for decreasing value from aging and use. For residential properties, this deduction is taken over 27.5 years. So, if you bought a $300,000 rental property, you could deduct around $10,900 per year.
Travel
Believe it or not, some travel expenses related to your rental can be deductible. Gas, mileage, airfare, lodging, and 50% of meals associated with time spent working on or evaluating your rental can potentially be written off. For example, a trip to meet a contractor doing renovations or visiting your rental for a walkthrough of issues to address. This is one of the lesser-known property investment tips that you shouldn’t ignore.
Rental Management Fees
Do you pay a property management company? These fees are deductible rental expenses. You can write off what you pay the management company for collecting rent, finding tenants, handling repairs and upkeep, or overall administering your rental property. Be strategic in deducting expenses using write-offs and take advantage of tax benefits as a landlord.
By fully using these and other eligible rental property deductions, landlords can realize significant tax savings each year. Be sure to consult the latest IRS rules and regulations around claiming rental deductions each tax year. Work with an active rental manager in Northern Virginia for proper documentation of your property-related expenses. With proper documentation and reporting, you may be able to deduct more expenses than you realized were available as a landlord.
Taking the Proactive Approach to Understand Tax Changes
As a landlord, one of the worst things you can do is get caught unprepared when tax laws change. Being blindsided by a new tax rule that limits one of your deductions could take a toll on your rental property profits. That’s why it’s critical to be proactive each year in understanding upcoming changes to rental property tax codes—before filing your tax return.
Follow Industry Publications
Publications like Landlord Magazine, Rental Property Reporter, and Fit Small Business offer great rental property tax updates each year. Subscribe to a few leading industry blogs, newsletters, or print magazines. This can clue you into major changes being proposed or finalized by the IRS that could impact your tax scenario.
Consult Your CPA
Schedule a consultation with your CPA at the beginning of each year—before you file taxes. Ask them specifically if there are any major rental property tax changes in effect that may alter your past filing approach. Maybe certain deductions were capped for the current tax year, or new schedule requirements will apply to depreciation claims. Keep your CPA in the loop on your rental activities so they can best advise you.
Continuing Education
Consider taking a continuing education tax course annually that is tailored specifically to rental property taxes. Even a short 4-hour online class can get you up to speed on the latest IRS rules around reporting income, taking deductions, record-keeping requirements, and flags to avoid. Both local colleges and national providers offer accredited continuing education around taxes.
Final Words
While staying on top of evolving rental property tax codes does require some time investment, it’s well worth it. The small effort you put into understanding changes proactively will pay off exponentially in tax savings and avoidance of issues with the IRS down the road. Make it a priority to check in on any new rental tax laws each year. Then, you can stay away from tax complications while enjoying the income generated by your rental properties.
Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.
