This might come as a surprise or a shock to you that you have to pay tax on your rental property as well. Yes, that’s right! Rental taxes are very important for a person to pay if they have a rental property.
To those who are unaware of the same, please give us a moment to clarify the basics first.
A Short Guide to Rental Taxes
Rental taxes are those that are levied on your rental property. It might look a bit complicated but is easy to understand in reality. Your rental tax obligation depends on how the property is being used. The IRS takes into account these three categories:
- A free tax rental is a property that you rent out for a maximum of 14 days per year. There is no need to claim income from this property on your tax return if the amount you’re charging is considered the ‘fair market rate.’
- A personal residence is a property you use for either 14 days or 10 percent of the total rental days.
- A rental property is a property that you rent for 15 days in a year.
How is the rental income taxed?
It may come as a surprise to you that rental income is actually taxed as ‘regular income.’ Simply put, this means that your total income for the year will determine your rental property income tax rate. There might be a possibility that you’ll be able to apply for the tax benefit that is open to qualified business income (QBI) for small business owners based on the recent changes in the tax code.
How to Calculate Rental Income and Rental Income Tax Rate?
You will need to have a look at every form of income that you’ve received for a property in any given year when calculating income tax on your rental income. Down below, you’ll see more of the income streams to include when reporting rental income:
- All advanced rent payments you receive.
- Any part of the security deposit that you have.
- Expenses like water, electricity, and PNG that are being paid by the tenants are also counted.
- Any services received from your tenants in the place of cash payment (cleaning services, property maintenance, etc.).
Earlier, rental income was also treated in the same way as ordinary income. Now, rental income is considered the same as qualified business income in some of the cases. According to the IRS, your real estate must qualify as a trade or business before you can be eligible for the QBI deduction.
Different types of Deductions You can Look Up To
Rental property owners are not obliged to pay tax on full rental income in any year. They actually get to deduct the cost of allowable expenses tied to maintaining their rental property. Some of the common deductions on rental properties are:
- Cost for advertising a property
- Payments made to a property manager
- Property taxes and insurance costs
- Pest-control costs
- Cost of cleaning and maintaining the property
- Legal and professional fees tied to owning a property
- Fees for utilities
- The cost associated with maintaining an office
This may bring joy to your face that the IRS is quite generous regarding deductions. But, having renovations done on the property won’t help with the tax calculation. It is added at the time of rental tax calculations.
Tackling with rental tax can be intimidating for you initially. However, with time, when you’ve owned a property for a full year, you will automatically understand all the necessary aspects of rental taxes. It will be better to get some tax help from an accountant in the first year as a property owner. This will ensure that you’re abiding by all of the IRS’s rules and maximizing tax benefits.