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Is Rental Income Taxable? What Landlords Should Know

Many landlords ask, ‘is rental income taxable?’  Whether you’re renting out one property or several, understanding taxes is crucial for your business’s health. In this article, we’ll cover the core tax tips every landlord should know—from what counts as rental income to how to track your expenses and deductions. These tips will help you handle tax season with less stress and keep more of your money in your pocket. Read below to learn more!

Stacks of coins with miniature houses on themIs Rental Income Taxable?

As property management in Baltimore can tell you, renting out a property is a business. After all, you’re managing tenants, maintaining the property, and, of course, getting income. As such, just like any other business’s income, your rental income is taxable and falls under federal and state tax laws. 

Now, it’s important to note there are some exceptions to this rule. For example, when you’re renting to a family member for way below the property’s fair market value, your income from that time period likely doesn’t count as deductible rental income. But generally, any money you get—whether it’s from monthly rent, advance payments, or even services tenants provide instead of rent—must be reported to the IRS and your local tax authorities.

As you can imagine, it’s critical that you understand rental taxation inside and out. It’s crucial not just for avoiding penalties, but also for ensuring you’re taking advantage of any deductions that can minimize the taxes you owe. Staying compliant keeps you in the clear and helps you run your rental property business smoothly.

What is Considered Rental Income?

Rental income is the money you get by renting out your property. This may seem straightforward enough, but there are actually multiple aspects of that that count as rental income. For example, beyond the typical monthly rent payments, advance rent payments, security deposits, tenant-paid expenses, and lease cancelling fees all count as taxable, according to the IRS. If your tenants give you services or goods instead of cash for rent, that counts too!

However, many people have misconceptions about this. For one, if you get a security deposit that you plan to give back to the tenant, it’s actually not taxable. However, if you retain it to cover unpaid rent or damage, then the portion you keep does count as taxable income. So, not everything you receive as a landlord is taxed—it depends on how you use it.

So, to answer, “is rental income taxable,” the answer is generally yes. That said, knowing what counts and what doesn’t will help you keep track of your earnings and ensure you’re reporting everything correctly.

Calculator, glasses, coins on a blue background.How to Calculate Taxable Rental Income

Now that we’ve answered the question, “Is rental income taxable?,” let’s dive into how to calculate it. This will serve as a helpful guideline as you tailor your process towards your unique situation. Without further ado:

  1. Start with Gross Income – To calculate your taxable rental income, you first need to know exactly the amount of money you’re garnering from all your rental income sources. This ranges from monthly and advance rent payments to any additional income like late payment fees or services your tenants provide instead of rent (like cleaning or yard work). To do this, simply add up all the money you’ve received from your rental properties.
  2. Deduct Allowable Expenses – Now that you’ve found your total gross income, subtract it by any allowable expenses related to maintaining and running your rental property. For instance, consider factors like repair costs, mortgage interest, property taxes, insurance premiums, and utilities. 
  3. Know Your Net Income – After you’ve deducted your allowable expenses, the amount left is your net income. This is the end result that’s subject to taxation. In other words, your taxable rental income is how much you ultimately have, minus your expenses from your total rental income.

Example Calculation

Let’s say you earned $20,000 in rental income throughout the year. Then, you spent $5,000 on repairs, advertising, and other deductible expenses. Once you’ve deducted those expenses, your leftover taxable rental income would come to $15,000 ($20,000 – $5,000 = $15,000). In the end, that $15,000 is what you’ll report to the IRS as your taxable rental income.

Wooden tiles spelling out "tax deductions"Common Rental Income Deductions

As we mentioned earlier, being upfront about your rental income can really work in your favor when it comes to deductions. There are numerous key expenses you can deduct to help minimize your taxable rental income. Here are the major ones:

Maintenance and Repair Costs 

Any money you spend on keeping your property in tip-top shape, like fixing a leaky roof, repairing broken appliances, or giving the walls a fresh coat of paint, can be deducted. So, keep detailed records and receipts of all your repairs and maintenance—these documents will prove crucial when you file your taxes.

Mortgage Interest and Property Taxes

Your mortgage interest and property taxes are deductible, so don’t forget to factor those in. Keep track of your mortgage statements and property tax bills throughout the year to make sure you can claim the full amount you’re entitled to. On that note, if you’ve refinanced your mortgage, maintain a record of the new terms. After all, if the interest amount changes, it will impact your deductions.

Depreciation

Over time, your property “wears down.” As such, you can deduct a portion of its overall cost each year as it depreciates. In other words, you can spread out your property’s expenses (minus the land value) over several years—usually 27.5 years for residential properties.

Of course, remember that the depreciation is based on the property’s value when you initially purchased it, minus any land value. So, make sure you get an accurate appraisal if necessary.

Utilities and Insurance Premiums

If you cover utilities like water, electricity, or gas for your tenants, or pay insurance premiums for your property, you can deduct those costs. Moreover, this includes any utilities you pay on the tenant’s behalf or for common areas, like water for shared spaces.

Marketing Expenses

Any money you spend on advertising to find tenants—whether it’s online ads, print listings, or even signage—is deductible. To give you an idea, this includes fees for digital marketing campaigns, printed flyers, and newspaper ads. 

Maximize Your Rental Income Tax Savings with the Experts

To answer the question, “is rental income taxable,” generally, yes. Luckily, you can deduct taxes from huge expenses like maintenance and repair costs, mortgage interest, property taxes, depreciation, utilities, and insurance premiums.

When it comes to navigating rental income taxes, things can get complicated. Because of that, having an expert to guide you in minimizing your tax burden can be invaluable. At Bay Property Management Group, we’re here to help you navigate the complexities of rental income taxation and maximize your savings. And that’s not all–we can also handle your property maintenance, legal compliance, inspections, rent collection, and so much more. Reach out to us today to get started!