If you are new to owning rental properties, you might have many questions about your investment’s tax implications. You could file a few different tax forms, with differing purposes, depending on the actual services you supply. There are also several other considerations regarding rental tax filing and amounts due.
Tax Forms
Corporations, LLCs, and partnerships that own rental properties report income from rental investments on their tax returns. Sole proprietors with rental properties will typically use schedules E or C to report their income.
- Tax Schedule E – Schedule E is the most common choice for landlords since it applies to rental agreements that supply only essential services such as trash, utilities, and maintenance. Unlike wages from a job or a regular business, rental income for sole proprietors isn't considered earned income. Schedule E reports "passive" income, which is not subject to the additional self-employment tax. Passive income is income that you receive but don't work for and "earn."
- Tax Schedule C – Schedule C addresses business profit and loss resulting from more than essential services provided to tenants. These services are often related to assisted living and housing provided for college students and can include meals, housekeeping, linen, maid, or laundry services. These offerings alter the rental profile into more of a boarding house or hotel, which is technically considered a business. You would also use a schedule C if your realty business rented out properties.
Other Rental Tax Tips
- The income you report applies to the tax year you received it, not when it was due.
- There are different forms to use for out-of-state rental property, requiring filing a nonresident form before preparing a resident state tax return.
- If you keep a tenant’s security deposit to cover a final rent payment, it should be claimed as income when you receive and deposit it, even if it’s an advance payment for the next fiscal year.
- Security deposits used to cover property damage and repair costs are considered income, but first, deduct the cost of the repair.
Rental Property Deductions
Claim as many deductions as possible to lower your tax burden. Supplies for cleaning, maintenance and office, insurance, utilities, repairs and maintenance costs, professional, tax preparation and legal fees, advertising, real estate taxes, loans and mortgage interest, loss and lease cancellation expenses, commissions, and fees are all common deductions.
Myrick CPA can take the worry and stress out of filing your rental property taxes and forms. We can help with as much or as little as you need to ensure that you receive the best possible tax results. We can also help you keep track of business expenses and creating your plan for the new year. Contact us today.