Everything First-Time Investors Need to Know About Tax on Rental Income

Everything First-Time Investors Need to Know About Tax on Rental Income

The rental property sector of the real estate market is thriving. Property owners are able to make passive income while gaining equity in their respective properties. Owning rental property can come with a boatload of challenges; however, there are many opportunities for tax advantages for rental property owners.

Many first-time rental property owners fail to seize all of the tax benefits available to them when filing.  Keep reading to learn how to grow your finances and best file a tax on rental income. 

What Qualifies as Rental Income? 

Property owners who rent out properties are required to report their rental income. These reports include all income that the property owner receives, even if it is not traditional rent. Once this value is determined, it is used to set the property owner's tax obligations. 

Rent

The most common type of rental income is monthly rent payments and security deposits from tenants. Rent is a fixed periodic return made by a tenant to the property owner in exchange for housing. 

This money is taxable in the year you use it from the tenant, making advance payments on rent taxable in the year they are paid, rather than when they are due. 

Services for Trade

Landlords may make an agreement with a tenant to exchange services in lieu of rent. Property owners are required to list the fair market value of these services as income. Although it is less common when landlords have skilled craftsmen or tenants who want to renovate, they may let the renovation or service be a substitute for rent.  

Tenant Paid Expenses

As the property owner, you adopt responsibility for property maintenance and utilities. If your tenants pay for a household expense they are not obligated to pay, you must also include that in your income. 

Tax Deduction Opportunities for Rental Properties 

When managing rental properties, it is important for property owners to be fiscally savvy. Being able to seek out tax deductions can help you finance repairs and grow your wealth. Here are a few tax deduction opportunities for rental properties. 

Mortgage Interest

If you are buying your first or second property, you can deduct up to $750,000 of secured mortgage debt. Investment properties allow you to deduct mortgage interest as a business expense. 

Property Depreciation

Property owners are able to cut their taxation requirements by allowing depreciation to occur. This depreciation will let you cut costs if your property meets certain requirements. 

If you expect your property to last for more than one year and has endured wear and tear, it may be eligible. Depreciating the value of your property can be beneficial for tax purposes. However, it may cut future profits when it comes to selling. 

Repairs and Renovations

According to the IRS, a repair to keep your rental property in good condition is deductible the year you finance the repair. There is a fine line on what is and isn't covered by the IRS, because any repairs or renovations which are viewed as excess or add significant value to the home are not tax-deductible.

Regardless, saving money on taxes is a great way to further finance repairs and improvements. 

Property Taxes 

Annual property taxes are an ongoing expense for real property owners. Because these properties are also used as a source of income, homeowners can deduct up to $10,000 for property taxes, state and local income taxes, or sales tax. The amount eligible for deduction is based on the level of activity within the property. 

Maximize Your Retention After Tax on Rental Income

Although rental income clearly seems like a positive-sum game, once you deduct operational costs and taxes, the financial benefits may seem less fruitful. In order to amplify your income retention, you must educate yourself on the tax on rental income restrictions and enlist savvy tax strategies. 

At the Home River Group, we specialize in helping property owners navigate the rental market. Connect our team of experts to master property management.  

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