5 Key Facts About Rental Income and Taxes: Expert Insights from Dimov Tax & CPA Services

In this article, we will explore five essential aspects of rental income and taxes that every landlord or property manager should be aware of. At Dimov Tax, we are committed to assisting you in navigating the complexities of rental income taxation.

1. Rental income encompasses four main components:

• Lease cancellation payments: When a lease is terminated, the amount received is considered rental income and must be reported in the tax year received.
• Advance rent: Rent paid in advance during the tax year it is received is classified as rental income.
• Tenant-paid expenses: Expenses paid by tenants can also be considered rental income, although certain expenses may be deductible.
• Security deposits: Security deposits have specific rules:
• • Refundable security deposits are not considered rental income.
  • If a tenant breaks the lease early and you retain a portion of the security deposit, the amount kept is rental income for the tax year.
  • If the security deposit is used to cover property damages and you deduct the repair costs as expenses, the amount kept is rental income.

2. Tax Rates on Rental Income:

Rental income is taxed similarly to other sources of income, with the tax rate determined by your tax bracket. For the tax year 2023, the IRS marginal tax rates are as follows based on filed income:

Individual:

• 37% for income of $578,125 or more
• 35% for income between $231,250 and $578,125
• 32% for income between $182,100 and $231,250
• 24% for income between $95,375 and $182,100
• 22% for income between $44,725 and $95,375
• 12% for income between $11,000 and $44,725
• 10% for income up to $11,000

Married/Joint:

• 37% for income of $693,750 or more
• 35% for income between $462,500 and $693,750
• 32% for income between $364,200 and $462,500
• 24% for income between $190,750 and $364,200
• 22% for income between $89,450 and $190,750
• 12% for income between $22,000 and $89,450
• 10% for income up to $22,000

3. Calculating Rental Income:

To calculate your rental income, sum up all rent received, including the fair market value of goods or services received. Exclude security deposits meant for lease-end refunds. Then, subtract property-related costs such as advertising, depreciation, insurance, maintenance, and taxes. The result is your taxable income.

• A positive total indicates your taxable rental income.
• A negative total can be deducted from other income sources, such as lost business revenue.
• A total of zero has no impact on your income.

4. Earned Income vs. Rental Income:

In most cases, rental income is classified as unearned income by tax authorities like the IRS. Unearned income includes sources such as rental income, interest, and dividends. However, there are exceptions. For instance, if you rent a dwelling unit as a personal residence for fewer than 15 days in a year, the rental income is not considered earned income and is not subject to taxation. If the property serves both rental and personal purposes, expenses must be allocated accordingly. Only rental-related expenses can be deducted.

5. Deductible Expenses for Rental Income:

Landlords can deduct various expenses from their rental income to reduce their tax liability. These expenses must be ordinary, necessary, and directly related to managing, conserving, or maintaining the rental property. Common deductible expenses include:

• Depreciation
• Operating expenses
• Repairs
• Property taxes
• Mortgage interest

Taking advantage of these deductions can help minimize your tax obligations. Ordinary expenses encompass routine payments for property maintenance, while necessary expenses include advertising, insurance, maintenance, and utility costs. Deductible expenses paid by tenants can also be considered.

Frequently Asked Questions:

1. Do you pay taxes on rental income?

Yes, rental income is generally taxable and must be reported on your federal income tax return. However, deductions can help reduce your tax liability.

2. Am I required to pay tax on rental income earned from a different state?

Yes, you must file a tax return in the state where the property is located, even if you reside in another state. Compliance with state and local tax laws is crucial.

3. What is the tax rate on rental income?

Tax rates on rental income depend on your tax bracket and vary by state and local regulations.

4. How do I avoid paying taxes on rental income?

Utilize available deductions, including ordinary and necessary expenses, to reduce your tax liability and optimize your return.

5. Will rental income affect my taxes?

Yes, rental income should be treated like any other form of income when filing your tax return. Consulting with an experienced tax professional ensures proper filing and maximum returns.

Partner with Professionals

To make the most of deductions and streamline your rental property tax obligations, collaborate with experienced professionals. Dimov Tax & CPA Services specializes in rental income and taxes, providing tailored solutions to help you optimize your financial position. Seek expert advice to maximize your rental property income and ensure compliance with tax regulations. Contact Dimov Tax today for exceptional accounting services!