Learning Your Tax Obligations As A Landlord

Becoming a landlord comes with the sweet benefits of a stable, passive income stream. However, it also brings along a set of financial and legal responsibilities, particularly regarding taxes.

Rental incomes are subject to both federal and state tax regulations, and it’s essential for landlords to understand these nuances. For example, the IRS distinguishes between real estate professionals who actively manage rental properties and individuals who earn supplemental income from renting out their homes.

In this article, we will highlight the key elements of rental property taxation and how landlords can navigate them.

Types of Taxes Landlords Need to Be Aware Of

Landlords should be aware of several types of taxes that may apply to their rental properties. The most significant is rental income tax, which is levied on the income generated from rental properties. This income must be reported on your annual tax return, and the applicable tax rate will depend on your total taxable income. 

Rental income is typically taxed at ordinary income tax rates, which range from 10% to 37% based on your income bracket.

Rental Income Tax

When you receive rental payments from tenants, these amounts are considered taxable income. This includes not only the rent itself but also any additional fees charged to tenants, such as late fees or pet fees. It’s essential to keep accurate records of all rental income received throughout the year to ensure proper reporting on your tax return.

How Can Landlord Studio Help?

Keeping accurate records is essential for tax compliance and maximizing your deductions. Landlord Studio simplifies the income expense tracking process making it easier than ever for landlords to stay on top of their finances and increase their rental property profits.

Capital Gains Tax

Another important tax is capital gains tax (CGT), which applies when you sell a property for more than its purchase price. If you have owned the property for more than one year, any profit made from the sale is classified as a long-term capital gain and is taxed at a lower rate than ordinary income—typically ranging from 0% to 20%, depending on your overall taxable income.

If you sell a property that you have owned for less than one year, the profit is considered a short-term capital gain and is taxed at ordinary income rates. Additionally, if you make improvements to your rental property that increase its value, these costs can be added to your basis in the property, potentially reducing your capital gains tax liability when you sell.

How Can Landlord Studio Help?

Landlord Studio allows you to track your property valuation and the overall capital gain of your property. Additionally, it makes it easy to track capital improvements that may affect the cost basis of your property.

Depreciation Recapture Tax

When selling a rental property, landlords must also consider depreciation recapture tax. This tax applies to the portion of the gain attributable to depreciation deductions taken during ownership. The recaptured amount is taxed at a maximum rate of 25%. Understanding how depreciation works and its implications when selling your property is vital for effective financial planning.

How Can Landlord Studio Help?

With Landlord Studio, you can track your total depreciation over time and run customizable reports to accurately and easily calculate the total depreciation claimed during your ownership period.

Inheritance Tax

Landlords may also encounter inheritance tax (IHT) if they pass their property assets to heirs, particularly if the total value exceeds the threshold set by law. While this tax does not directly affect active landlords during their ownership, it’s important for estate planning purposes. Knowing how IHT works can help landlords make informed decisions about their properties and potential transfers to heirs.

Overview: Rental Property Tax Deductible Expenses

One of the advantages of being a landlord is the ability to deduct certain expenses from your taxable rental income, thereby reducing your overall tax liability. According to the IRS, here are some of the common deductible expenses:

• Advertising Costs: Any expenses incurred in advertising your rental property to attract tenants are fully deductible. This includes costs for online listings, newspaper ads, or promotional materials.
• Maintenance and Repairs: Routine maintenance and repairs necessary for keeping the property in good condition are deductible. However, improvements that increase the property's value must be capitalized and depreciated over time rather than deducted in full in the year incurred.
• Mortgage Interest: Landlords can deduct interest paid on mortgages taken out to finance their properties. This deduction often represents one of the largest expenses associated with owning rental real estate.
• Depreciation: Landlords can recover the cost of their property over time through depreciation deductions. Residential rental properties are typically depreciated over 27.5 years using a straight-line method.
• Utilities: If you pay utilities on behalf of your tenants (such as water, gas, or electricity), these costs are deductible as operating expenses.
• Property Management Fees: If you hire a property management company to handle day-to-day operations, the property management fees are fully deductible.
• Insurance Premiums: Premiums paid for landlord insurance policies covering property damage or liability claims are deductible.
• Legal and professional fees: Fees paid for legal advice or services related to managing your rental properties are also deductible.

Related: A Complete Breakdown of your Schedule E Expense Categories

Tracking Income and Expenses With Landlord Studio

Landlord Studio simplifies income and expense tracking for landlords with powerful automated financial management tools that eliminate the need for spreadsheets and manual record-keeping. 

Features automatic expense categorization, receipt scanning, and real-time financial reporting, landlords can ensure accurate bookkeeping and maximize tax deductions. The platform also syncs with bank accounts, allowing for seamless transaction imports and reconciliation. 

Unlike spreadsheets, which require manual data entry and can lead to errors, Landlord Studio provides tax-ready reports, automated reminders for payments, and a mobile app for on-the-go management. 

Save time, reduce errors, and make tax season easy with Landlord Studio. Create your free account today.

Differences Between Passive Income and Active Income

When getting to grips with your tax obligations as a landlord it’s important for landlords to understand the distinction between passive income and active income. 

Despite the amount of work required to actually manage a rental, rental income is generally considered passive income by the IRS. But, if you qualify for real estate professional status (REPS) this might change and can have a significant impact on your taxes.

Passive Income

Passive income is defined as earnings derived from activities in which you do not materially participate. For most landlords who own rental properties rental income is deemed passive by the IRS. What this means in terms of taxation, is that passive losses can only offset passive gains; you cannot deduct passive losses against other types of income (eg. W2 income) for example.

Active Income

Conversely, if you can prove you are actively involved in managing your rental properties you may qualify for the REPS. This classification essential allows you to deduct your real estate losses without limits. Qualifying for the REPS is not easy, however, requiring you to prove that you spend the majority of your time and at least 750 hours a year managing property. 

Importance of Setting Reminders for Tax Deadlines

Tax deadlines can be easily overlooked amidst the many responsibilities that come with being a landlord. Setting reminders for important dates - such as when to file your annual return or make estimated tax payments - can help ensure you remain compliant with IRS regulations.

Key Deadlines

• Annual Tax Return: Typically due on April 15th each year unless extended.
• Quarterly Estimated Payments: If you expect to owe $1,000 or more in taxes after subtracting withholding and refundable credits, you may need to make quarterly estimated payments due on April 15th, June 15th, September 15th, and January 15th.
• 1099 Forms: If you pay contractors $600 or more during the year (e.g., maintenance workers), you must issue them a Form 1099-NEC or 1099-MISC by January 31st.

With Landlord Studio you can ensure you never miss a deadline with our built-in calendar feature and automated reminders, allowing you to focus on managing your properties rather than worrying about missed due dates.

Benefits of Working with a Real Estate-Focused Accountant

Navigating tax obligations can be complex; therefore, many landlords benefit from working with an accountant or CPA who specializes in real estate taxation. These professionals possess specialized knowledge around salient tax laws and regulations and can provide valuable insights into maximizing deductions while ensuring compliance with current laws.

How Landlord Studio Can Help Track Deductible Expenses

Managing finances as a landlord requires meticulous record-keeping; this is where tools like Landlord Studio come into play. Landlord Studio offers features that allow you to easily track deductible expenses throughout the year with minimal effort.

Key Landlord Studio Features

• Expense Tracking: You can categorize expenses such as maintenance costs, advertising fees, mortgage interest payments, etc., making it easy to see where money is going.
• Receipt Scanning: The app allows users to scan receipts directly into their accounts so that all documentation is stored in one place.
• Tax-Ready Reports: At tax time, Landlord Studio generates comprehensive reports summarizing all relevant financial data needed for filing taxes accurately.
• Automated Reminders: The app sends reminders for upcoming rent payments or lease renewals so that nothing slips through the cracks.

Make tax season a breeze and streamline your rental property accounting with software designed for you and ensure you never miss and expense again. Create your free Landlord Studio account today.