How is rental income taxed?

| Jun 8, 2021 | Tax Law |

Rental income serves as a way entrepreneurs familiar with property investments may find potentially lucrative. As long as the rental income exceeds expenses, then the venture could be worthwhile. New California landlords might overlook an unavoidable cost: taxes. Rental income is subject to tax, although the taxation process could be relatively straightforward.

Paying taxes on rental income

The term “rental income” reveals some hints at how the Internal Revenue Code levies taxes. Rental income ends up taxed as ordinary income. Someone who rents a room in a house and receives $6,000 per year would report the funds as income, minus deductions. And yes, there are several legal deductions available to landlords.

Renting property comes with insurance, maintenance, and, possibly, cleaning costs. If the landlord is responsible for keeping the lawn mowed and covering plumbing repairs, those expenses might be deductible from the annual rental income.

The tax code reveals other legitimate tax deductions available to landlords. Understanding what is legal and what is not is essential. Anyone taking improper deductions may face an audit and potential fines. A taxpayer may face criminal charges, depending on the level of fraud.

Other points about rental income and taxes

Renters hoping to save money might devise a “barter plan” with a landlord. Perhaps the renter handles all the repairs and maintenance and serves as a property manager who deals with other renters in the house. If the tenant receives a $500 deduction on the rent, that $500 might still be taxable. After all, the landlord received a $500 monetary benefit.

Federal tax law could prove confusing even for those who’ve been offering rentals for years. Perhaps new information may lead someone to amend several previous tax returns.