Rental Income Tax Rate: How Rental Income Is Taxed

There are a lot of potential advantages to owning investment properties - particularly in the Tampa area, where you could rent to vacationers or even service members stationed at nearby MacDill Air Force Base. But owning a rental property can also be challenging, particularly when it comes to figuring out the financial aspects. This includes figuring out how you can afford to own multiple properties - and whether or not you have to pay taxes on your rental income.

The short answer is that rental income is taxable and will typically be taxed as ordinary income at the rate assigned to your current tax bracket. However, you can offset your rental income with deductions for the cost of maintaining your rental property and depreciation of the asset itself. Figuring out these rules can be complicated, so it is a good idea to work with a tax professional to ensure that you are following the law and getting the optimal breaks on your taxes.

At Eaton Realty, we work with investors and landlords to help them manage their rental properties. Whether you own commercial or residential real estate, our property management services will give you peace of mind, knowing that our team is taking care of all of the details, from handling maintenance calls to keeping accurate records. Call us today to learn more about how we can help you manage your investment properties in Hillsborough County, Florida.

Looking To Maximize Rental Income? Speak With A Property Manager › 813-672-8022

Will I Be Taxed on Income from My Rental Property?

As a general rule, rental income is taxable. While there are some exceptions - such as renting out a residence for fewer than 15 days in a year - most people who own investment properties will have to report any rent as income. The IRS defines rental income as any payment that you receive for the use or occupation of property that you own.

For tax purposes, it does not matter if you own many investment properties or just one rental property. Rental income is still taxable. For example, if you get married, and your spouse decides to rent out their home rather than sell it when they move into your house, they will be taxed on the rental income. In the same way, if you have purchased several properties over the years for the purpose of renting them out, you will have to pay taxes on any income.

As a landlord, you must report all income from your investment properties. However, this income can be offset by subtracting expenses that you incur to maintain your rental property. Rental income should be reported for the year in which it was paid and may include goods or services given by a tenant in exchange for rent.

While rental income is taxable, security deposits are not - at least not when you receive them. If you keep all or some part of the security deposit, however, then it becomes taxable income for the year that the lease ended. If you kept the deposit due to damage to your property, the cost of repairing the damage can be deducted from your income.

The rules surrounding rental income tax can be complicated. For example, if you own a vacation home, you can still use it yourself - but only for 14 days or 10% of the days that the unit is rented. If you exceed that amount, then you can’t deduct expenses beyond your rental income.

One of the keys to ensuring that you comply with all applicable tax laws is keeping careful records of the rent that you received and when you received it. At the same time, you should carefully track the expenses associated with getting your property ready to rent and maintaining it as a rental.

How Is Rental Income Taxed?

In Florida, there is no individual income tax. However, you will be required to pay a sales and use tax. The amount of sales and use tax you must pay on rental income depends on the type of property (commercial versus residential) and other factors.

In addition to sales and use taxes, you will need to pay federal income taxes. The tax rate for rental income will vary based on how you hold the property and your tax rate. Many people who own a single investment property do not form a limited liability company (LLC) or other business entity to manage it. As such, any rental income will be taxed as part of their personal income at the rate of their tax bracket.

For 2022, the federal income tax rate ranges from 10% for individuals making less than $10,275 per year ($20,550 for couples) to 37% for individuals making$539,900 ($647,850 for couples) each year. Your rental income is considered part of your annual income, so including it may bump you up to another tax bracket. Fortunately, it is possible to reduce your taxable rental income through deductions, as explained in greater detail below.

To report rental income as an individual (or couple), you will need to fill out Schedule E, Supplemental Income and Loss. On Schedule E, you’ll be able to report both rental income and expenses. Schedule E is then filed with your Form 1040. On Schedule E, you should include the following:

Rent received during the tax year

Any advance payments of rent

Fees received from tenants (such as late fees or pet fees)

Non-refundable security deposits that you keep

Goods or services in lieu of rent

Expenses paid by tenants to the landlord

If you set up an LLC to own your rental properties, you will still pay taxes on the rental income because the LLC’s profits “pass through” to the owner. As such, you will pay income tax on your share of the profits of the LLC. The tax rate will depend on your tax bracket as an individual or as a couple.

There are other tax implications for different corporate forms, such as a sole proprietorship, corporation, or limited partnership. If you have questions about how your taxes will be affected by holding a property in a LLC, corporation, or other entity instead of owning it as an individual, you should consult with a tax professional.

As a Landlord, What Expenses Can I Deduct?

The money that you spend to get a property ready to be rented and to maintain a rental property is typically deductible. This is true even if a property is vacant as long as it is held out for rent. You should carefully document all rental expenses so that you have records if your deductions are challenged.

Deductible expenses may include a range of costs, including:

Cleaning

Maintenance

Pest control

Landscaping or yard maintenance

Professional fees

Management fees

Travel expenses

Trash removal fees

Utilities

Advertising

Homeowner association dues or condo fees

Insurance premiums

Local property taxes

Mortgage interest

Equipment rental

Repairs

Supplies

• Notably, improvements are not a deductible expense. If you shell out cash to improve your investment property in some way - such as by fencing the yard - then you can deduct the expense over time through depreciation (as explained below). If you try to deduct an improvement, it may result in trouble with the Internal Revenue Service (IRS).

Any expense that you deduct must be ordinary and necessary. It also cannot be extravagant. For example, if you own a rental property in FishHawk Ranch and live in New York, you can deduct your travel expenses if you travel to Florida to get the unit ready after a tenant vacates the premises. However, if you travel for a week and only spend a day or two getting the house, then you may not be able to deduct all of your travel expenses.

One major expense that you can deduct with rental properties is depreciation, which is taken over several years using Form 4562. Depreciation is the reduction in the value of an asset with the passage of time. To figure out depreciation, you will need to:

Determine your cost basis (typically the amount that you paid for the property).

Allocate the cost by type of property (the land, the building itself, and any appliances or furniture included with the rental)

Calculate the depreciation for each type of property.

Different types of property use various types of depreciation. It is calculated based on the useful life of the property. For residential rental properties, the “useful life” is 27.5 years, so depreciation will be calculated by dividing the property's value by 27.5.

Your accountant can work with you to help you understand how depreciation affects your rental property tax rate. The important thing to know is that depreciation is a type of deduction that allows you to reduce the amount of taxes that you owe.

Again, it is important to recognize that the laws surrounding the taxation of rental properties are complex. A skilled property management company can make sure that your records are in order so that your tax professional can take the necessary deductions and depreciation to reduce your taxable income for your rental properties.

Are You Charging Enough For Rent?

Maximizing your rental net income is about more than reducing taxes. You may be able to charge more in rent than your currently charging. The property management team at Eaton Realty offers a free rent value analysis service. We'll analyze the market and your property to report on what we believe you could be charging each month for rent. You can request a free rent value analysis by filling out our rent value request form. 

How Eaton Realty Can Help

There is a lot that goes into being a successful real estate investor and landlord. In addition to choosing the right property, you will need to find good tenants and handle the day-to-day tasks associated with owning rental properties. The team at Eaton Realty is here to help you with every step of the process.

Based in Lithia, we work with buyers, sellers, renters, and landlords throughout the Tampa-St. Petersburg region. We have an in-depth understanding of the real estate market in the area, as well as the types of documentation that you will need to maximize your deductions - and minimize your taxes - for your rental income. To learn more about our property management services, fill out an online contact form or give us a call at 813-592-8582.

The tax information disclosed above does not constitute legal or financial advice. Use this information at your own discretion and consult a legal or financial professional for further guidance.

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