The Investor's Guide to Paying Tax on Rental Income

The Investor's Guide to Paying Tax on Rental Income

Ben Franklin once said that "nothing is certain except death and taxes." For something so certain, taxes can be incredibly confusing for the majority of people! 

If you are entering your first tax season as a property investor, you are probably feeling a little overwhelmed. How are you supposed to correctly handle paying tax on rental income? 

There are many factors that go into determining what you will pay taxes on from your rental income this year. The repairs you made, the depreciation of your property, and the insurance and other fees you paid can all impact the amount of tax you will need to pay. 

Do you need a crash course in paying tax on rental income from properties in Charlotte, North Carolina? Keep reading for some of our tips!

Is All Rental Income Taxable?

You will need to start paying tax on rental income, but not all of the money that comes in from your tenants is taxed. Your security deposit, the costs of upkeep and repairs, and more can all be deducted from your taxable income.

When you pay taxes, you'll need to pay for the year the money was received. For example, if your tenant paid their December 2020 rent in January 2021, then you will include that income on your 2021 tax forms.

What Can I Deduct?

There are a variety of expenses that you can deduct from your total amount of taxable rental income. Costs such as:

  • Advertising
  • Cleaning
  • Supplies
  • Depreciation
  • Property management Fees
  • Insurance
  • Equipment Rentals
  • Trash Removal
  • Pest Control
  • Local Property Taxes
  • And more!

In general, any expenses that go towards the preparation and upkeep of your property are deducted when it comes time to pay taxes. All of your income and expenses will need to be listed on a Schedule E: Supplemental Income and Loss form that you will file with your Form 1040.

How Do I Calculate Depreciation?

Depreciation is a deduction that you take gradually as the years pass by. It is a calculation of the general loss of value that a property might experience over time.

When you calculate depreciation, you'll first need to find the cost base for your property. The cost base is the amount of money you paid for the property (along with any expenses tied to the purchase).

Then you will need to identify the types of property present. Is there land? Are there buildings present on the property? Is it a home or a condo that is a part of a collective unit? You can even include larger purchases on the property like furniture or fencing!

Once you know the cost base and the property types, you can use the IRS-provided tools to calculate the depreciation of each piece of your property.

Who Can Help Me with Paying Tax on Rental Income?

Working with property managers and tax professionals is a worthwhile investment if you are new to paying tax on rental income.

A property manager can help keep track of all of your rental income for the year, including money paid by tenants, the costs of repairs, and the money invested into things like marketing and advertising.

Keeping track of your earned income, financial statements, tax statements and 1099s can make tax season as stress-free as possible. 

If you are interested in learning more about paying tax on rental income, or how a property manager can help you, contact us today!

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