Tax season is here again, and if you own rental property, you may be required by the IRS to file and report all rental income on your tax return.
Table of Contents
- What Counts as Rental Income?
- Is Rental Income Taxable?
- What Tax Deductions Are You Entitled to as a Rental Property Owner?
- Top 7 Tax Deductions for Landlords
- Documents Landlords Need Throughout Tax Season
- What Is the Proper Way to Report Income and Expenses?
- How Can Mashvisor Help?
Taxes can be scary for first-time and experienced landlords, especially in light of recent events. After all, one wrong tax move may result in your rental business being pulled in the wrong direction.
We’ve compiled a list of the top tips on reporting your tax on rental income to guide you through the 2022 tax season and make the most of your tax return. Let’s get started.
What Counts as Rental Income?
You should include all rent payments in your annual revenue in most cases. Any amount you get for the use or occupation of property is referred to as rental income. The income for all of your assets must be reported. Aside from regular rent payments, additional amounts may be income and must be recorded on your tax return.
Advance rent is any amount of money received before the period covered. Regardless of the time covered or the form of accounting used, incorporate advance rent in your income when you obtain it. For instance, suppose you sign a 10-year lease for your rental house. You will receive $5,000 during the first year’s payment and $5,000 for the final year of the lease. You will need to include $10,000 in your income during the first year.
Security deposits utilized as final rent payments are considered advance rent. Include it in your income when you get it. If you are planning to return a security deposit to your renter at the expiry of the lease, do not include it in your income when you obtain it. However, if you keep a piece or all of the deposit throughout any year because your tenant does not follow the lease terms, include the sum you own in your income for that year.
The main distinction between advance rent and security deposit is how they are managed. Advance rent is a one-time expense for a particular term. When the said period expires, it becomes a cost for the tenant while the landlord earns an income.
On the other hand, security deposits cover the entire contract duration. The landlord returns the deposit to the tenant when that period is up. They might, however, deduct certain charges from it.
Is Rental Income Taxable?
Yes, it is. However, this does not indicate that everything you get from your tenants is subject to taxation. You may lower your rental revenue by deducting expenditures related to prepping your property for rent and then maintaining it as a rental.
- Rental income and expenses are reported on Schedule E, Supplemental Income and Loss.
- Schedule E is then submitted along with your Form 1040.
What Tax Deductions Are You Entitled to as a Rental Property Owner?
When it comes to taxes on rental income, you may deduct several rental expenses on your tax return if you earn income from leasing a residential unit. Property tax, mortgage interest, operational expenses, depreciation, and maintenance are examples of such costs.
You may deduct regular and essential expenses incurred in managing, protecting, and maintaining your current home for rent. Typical fees refer to common and widely recognized charges in the business. Interest, taxes, advertising, maintenance, utilities, and insurance are all examples of necessary expenses.
You can deduct the price of certain goods, materials, renovations, and maintenance you perform on your rental property to keep it in excellent working condition. Moreover, if the expenses paid by the renter are deductible rental expenses, you can deduct them. You can exclude the same number as a rental expenditure when the fair market property value or services are included in your rental revenue.
Rental Income Tax Rate: Charges You Can’t Deduct
The cost of renovations is not deductible. An income property is upgraded only if the funds are used to improve, restore, or adapt it to a different or new use. Depreciation is used to recover the cost of modifications. You can recover all or most of your improvements by utilizing Form 4562 to report depreciation starting in the year your property is initially put into service.
Also, at the beginning of every year, you make an upgrade or add furniture. Only a portion of the costs is deductible in the year they are paid.
Top 7 Tax Deductions for Landlords
Almost no other investment offers more tax advantages than rental real estate. Such advantages can often be the difference between losing revenue and making a profit on an investment home. The following are the top seven tax breaks for owners of residential rental properties.
Interest is sometimes the single largest deductible item for a landlord. Mortgage interest charges on loans used for renovating or buying property and interest on credit cards for services or goods used in a rental business are typical cases of interest that landowners can deduct.
2. Rental Real Estate Depreciation
The actual cost of investment properties, apartment buildings, or other rental properties is not entirely deducted in the year of purchase. Instead, landlords recover their investment in real estate via depreciation. It includes subtracting a percentage of the property’s cost over time.
Renovations to rental property are entirely deductible in the year they are done (assuming the repairs are expected, necessary, and fair in amount). Repainting, repairing gutters or flooring, repairing leaks, patching, and replacing shattered windows are all examples of deductible repairs.
Landlords can claim a tax deduction for most of the traveling they perform for their rental business. For instance, you can subtract your travel expenditures if you drive to your rental apartment to deal with a renter issue or go to the supply store and buy an item for a repair. Nevertheless, you cannot deduct the cost of travel to upgrade your rental home. The costs must be applied to the property’s tax basis and depreciated over a long period.
You can deduct practically any insurance premiums you spend for your rental operation. It covers rental property fire, burglary, flood damage, and landlord’s liability insurance. You can also deduct the amount of your employees’ healthcare and workers’ compensation insurance if you have any.
6. Office at Home
If they fulfill certain minimum conditions, landlords can deduct home office expenses from their taxable rental income. The deduction covers office space and workshops or other residential workspace used for your real estate business. It is valid whether you own or lease your home or apartment.
7. Personal Property
Personal property utilized in a rental service can usually be deducted in one year using the de minimis safe harbor deductions (for assets costing up to $2,000) or 100% bonus depreciation, available from 2018 through 2022. Appliances or furnishings in rental units and gardening equipment are examples of such private possessions.
Documents Landlords Need Throughout Tax Season
It’s critical to keep precise records as a landlord, especially if you’re going to claim any of the deductions mentioned above. Keeping organized landlord records might assist in easing the burden of tax season. You can simply identify receipts, monitor deductible spending, and file your tax returns if your rental records are organized.
Keep the following records in order:
- Insurance policies
- Loan documents
- Tax records from the past years
- Real estate investment documents
- Any documents related to the business entity
- Any permits obtained for the property
- All legal documents
- All tenant contracts or rental agreements for all of your properties
Landlords must also examine their short-term track record. They are documentation related to income or expenses for the tax year in question. They can include:
- Receipts for repairs
- Receipts for rent payments
- Mortgage interest
- Receipts for utility costs
- Credit cards for rental businesses
- Rental property marketing and listing fees
- Legal or professional expenses for lawyers and more.
To complete your tax returns, you must keep accurate records. The documents must back up the income and expenditures you disclose. In most cases, they are the same records that you use to track your real estate activities and generate your financial statements.
What Is the Proper Way to Report Income and Expenses?
Suppose you rent out real estate, such as houses, rooms, or flats. On the relevant line of Schedule E, enter your total income, costs, and depreciation for each investment home. To determine the amount of depreciation to put on line 18, consult the Form 4562 Instructions.
If you own over three rental homes, fill out and attach as many Schedules E as you will need to list them. You must fill out Lines 1 and 2 for each unit, including the street number/address.
Your loss may be restricted if your rental expenditure exceeds your income. The passive activities loss criteria and the at-risk standards may limit the amount of loss you can subtract.
How the Rental Income Tax Functions
According to the IRS, rental property is one that you own and lease to renters for 15 days or over every year. The IRS defines rental property as a single building, condominium, apartment, vacation home, or similar residence.
How is rental income taxed? Any net revenue generated by your rental property is taxable as regular income on your tax return. For instance, if your net income for the year is $20,000 and you are in the 30% tax range, you will owe $6,000 in taxes.
How Can Mashvisor Help?
Real estate investors must deal with figures and projections connected to their business. More precisely, the investor must determine whether the plan will assist them in generating revenue or not—and then move accordingly. That’s why Mashvisor provides one of many tools that can help with the analysis.
Rental Income Calculator
Mashvisor provides one of the greatest calculators for real estate investors. The platform employs the most recent and extensive data analytics to generate the most realistic income forecasts for an Airbnb or regular rental property. The rental income calculator enables investors to conduct neighborhood analyses to determine the optimal rental strategy for each location.
Once the user enters all of the property’s essential information, such as the one-time startup fees and monthly bills, it calculates critical metrics such as cash on cash return, cash flow, and cap rate at the property level.
One of the most important fees associated with purchasing and owning a home is the mortgage. To make a profit and reach their financial goals, investors and homeowners must understand how to navigate the real estate market efficiently.
They must choose between different forms of mortgage loans and obtain the best mortgage rates. Getting the most beneficial repayment conditions also contributes significantly to maintaining a healthy cash flow. A mortgage calculator will assist you in making the most of your selected mortgage financing type for your property.
You may use Mashvisor’s mortgage calculator to see if you’ll still earn a profit (or not) after completing all of your mortgage payments on your house. Simply enter the property’s cost, down payment, and interest rate to begin using the tool. You can also choose a mortgage kind and a loan term.
Owning rental property provides several benefits, with tax deductions and other perks being one of the most significant. Tax legislation in the United States is particularly favorable to real estate investors, which is why so many individuals invest in rental real estate nowadays.
You can use your rental income to buy more than one investment home while subtracting the mortgage interest charge if you use leverage properly. You will pay lesser taxes while increasing your real estate investing portfolio. Gains from the sale of rental property can also be helpful in expanding your portfolio.
In addition to a real estate calculator, Mashvisor comes with an excellent set of real estate investment tools to help you along the road. Whether you choose long-term or short-term rentals, you will undoubtedly find the tool beneficial for your specific needs.
To access our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by a 15% discount for life.