About 44 million households in the US are renters.
Owning rental property is a great way to generate income, but like all income, you'll have to pay taxes on it. Knowing how is rental income taxed will help you ensure you pay the correct amount each year. There are also certain things you can do to reduce the amount you'll be taxed.
In this guide, we'll go over everything you need to know about rental real estate taxes. Keep reading for more.
How Is Rental Income Taxed?
The amount you'll be taxed by the IRS for rental income depends on how much you make and how you file your taxes. Owning more properties and charging more rent will likely put you in a higher bracket. It counts as ordinary income, so will be calculated based on your rental income in addition to other income that you make.
There are several brackets that determine how much you'll be taxed overall. In 2023, the lowest rental income tax rate is 10%, and the highest is 37%. For a single filer, for example, your rate would be 10% if you earn $11,000 or less. For the highest tax bracket, you'd need to make over $578,125.
You can file as a single filer, a married couple filing jointly, or as the head of a household. All the information you need for filing is available on the IRS website.
Calculating Rental Income
The IRS considers any payment that you get for the occupation or use of your property as rental income. This includes:
- Advance rent payments
- Security deposits
- Tenant-paid owner expenses
- Lease cancellation payments
- Property or services received instead of rent
- Partial interest
- Lease with an option to buy
Make sure you factor any of these in along with your standard rent payments.
Rental Income Tax Deductions
You can reduce the overall income that you're taxed on by deducting various expenses. This can include things like:
- Advertising
- Insurance
- Property management
- Cleaning and maintenance
You'll typically take any deductions in the same year as you've paid for them. You can also deduct any costs from buying and improving a rental property, further helping you reduce how much you need to pay.
When Selling a Property
Taxes work differently when you sell a property. You will likely be liable for both capital gains tax and depreciation recapture tax.
Capital gains tax is fairly simple to work out, but depreciation recapture tax is far more complicated, so it's highly recommended to seek out professional tax assistance.
Reporting Rental Income
You need to report your rental tax income every year.
This needs to be done correctly and accurately using Form 1040 (for individual income tax returns) or Form 1040-SR (for seniors).
Managing Your Rental Properties
Knowing how is rental income taxed is important for any rental property owner. It's worth noting that things can get complicated, and this is just one aspect of owning rental properties. There are a lot of elements you'll need to stay on top of, and it can become quite challenging.
One of the best ways to make things easier for yourself is to work with a property management company. Harland Property Management offers a range of property management services in San Diego. Take a look at our Property Management page to find out more about what we do.
