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rental income tax

Rental income tax guide for landlords

Becoming a landlord presents incredible opportunities for stable passive income. However, it also presents new financial and legal obligations, including paying rental income tax. There are several nuances to taxation of rental income, especially since there are differences between how the IRS treats real estate professionals renting out a property compared to those who simply receive supplemental income from rental activity.

Here is what you need to know:

Do I have to pay rental income tax?

Generally speaking, if you are making money from operating a rental property, yes, you need to report and pay taxes on your income. Rental activity creates taxable income in a majority of cases. The only exception to this rule is if you rent out your primary residence, such as renting out a bedroom on a homestay website for less than 15 days during the tax year. No income is required to be reported in that case.

However, if you rent out your primary residence for longer than 15 days or have a vacation or investment property, you must report and pay tax on the net rental income. In most cases, rental income is considered investment income and it doesn’t trigger self-employment tax like a “side hustle”. However, if you are a real estate professional or looking to make rental activity a full-time gig, you may need to pay self-employment tax in addition to income tax if you have not yet set up a corporation or LLC that may exempt you from this tax.

What types of expenses can I deduct as a landlord?

You can deduct expenses associated with rental activity if they are required to maintain the property, find a tenant, solve disputes, comply with the law, and other aspects of collecting rent and keeping your investment safe. The following items are deductible:

  • Advertising your rental through property listings, websites, and other methods
  • Legal and professional fees
  • Property management fees
  • Insurance
  • Mortgage interest and real estate taxes
  • HOA/condo board maintenance fees, if a condo property
  • Repair and maintenance labor
  • Purchase, installation, and maintenance of appliances and furniture
  • Supplies used to get the property in move-in condition
  • Legal and professional fees related to the lease or tenant disputes
  • Collection agency fees
  • State and local taxes on rental activity
  • Utilities

If the property is unoccupied and it takes longer to get a tenant than you anticipated, you cannot deduct the rent that you would have received. You only report the rent that you eventually do receive, but you can deduct the marketing expenses related to attempts to obtain tenants. You can also deduct the operating and maintenance expenses in the time that the property was vacant but available for rent.

If the property does not meet building codes or a complaint is filed against you and the state or city takes action, you cannot deduct any fines or penalties. Only fees paid to attorneys, accountants, and other compliance professionals are deductible, along with local taxes and the labor costs involved in maintaining and improving the property.

If my rental activity results in a loss, can I deduct it?

Most small landlords have a limit on the amount of rental loss that you are allowed to deduct. There are specific rules for losses from passive rental activity if you are not a full-time real estate professional such as a realtor or property manager.

Additionally, there are limits on your rental loss if you are renting out your primary residence (or put any other property to personal use).

Do landlords have to issue 1099 forms to contractors?

Form 1099-MISC is used to report payments made to contractors as part of business during the tax year. Payments can include fees for one-time services such as fixing a burst pipe to ongoing fees like lawn care or housekeeping for your rental units. If you paid the contractor more than $600, you may need to file a 1099-MISC. Generally speaking, if you made payments to corporations, paid using a payment processor like PayPal, or hired the contractor through a third-party platform, you do not have to file 1099s for those payments. If you have hired a property management company, the property manager may handle the 1099s for you, but it is important to confirm.

If you are unsure about filing a 1099, a tax lawyer or accountant can help.

What tax deadlines do I have as a landlord?

Your tax due dates will vary depending on your business structure. The IRS has published a calendar for tax deadlines, but generally speaking, here are a few dates to know for 2020:

January 31, 2020

  • Form 1099-MISC

March 16, 2020

  • Form 1065 (Multi-member LLC, LLP or partnership)
  • Form 1120-S (S-Corporation)

April 15, 2020

  • Form 1040 (Individual tax return, including income from a single-member LLC or unincorporated business)
  • Form 1120 (C-Corporation)

There may also be additional state and local deadlines for rental taxes, as well as self-employment taxes and quarterly estimated tax payments if you are a full-time self-employed real estate professional.  A CPA or accountant can help you determine all of the deadlines and forms that apply to your specific situation.

Navigating your taxes as a landlord can be difficult and time-consuming. If you have legal questions, connect with a tax attorney to get your rental activity on the right track!

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