Tax Tips for Salaried Employees with Rental Properties
Leanna
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Salaried workers who take on a side rental property can earn additional income, but they also face a new set of tax responsibilities. This guide explains what you must know to remain compliant, reduce liability, and maximize deductions.
INTRODUCTION
If you receive a steady salary and own a rental property, the IRS treats the rental income as passive income. Even if you’re not a full‑time landlord, the same rules for all renters apply to you. Understanding these rules early can help you avoid surprises when you file your return.
TAXABLE INCOME FROM RENTALS
- Total Rental Income – Sum all rent payments received during the year. Add any security deposits that are refunded to tenants.
- Extra Income – Charges for parking, 確定申告 節税方法 問い合わせ laundry, or other services are taxable.
- Reporting – Rental income and expenses are reported on Schedule E (Supplemental Income and Loss). The form is attached to your Form 1040.
You can deduct ordinary and necessary expenses from your gross rental income. Commonly deductible items include:
- Mortgage interest plus property taxes
- Rental property insurance premiums
- Repairs but not improvements
- Utilities you pay on behalf of tenants
- Professional services such as accounting, legal, property management
- Depreciation of the building, excluding the land
- Advertising, moving expenses, and office supplies used for rental operations
Depreciation uses the Modified Accelerated Cost Recovery System (MACRS). For residential property, the recovery period is 27.5 years. You can use IRS depreciation tables or a spreadsheet to monitor it.
SPECIAL RULES FOR SALARIED WORKERS
Because payroll tax withholding is already in place, the IRS won’t double‑tax your rental income. However, you must still pay self‑employment tax if your rental activity is considered a trade or business. Typically, residential rentals are passive, so the 15.3% self‑employment tax is not applied. If you actively manage the rental—frequent repairs, showing the property, or offering major services—the IRS may treat it as a business, triggering self‑employment tax.
CONSOLIDATED DEDUCTIONS
If your rental loss is below $25,000 and you file a joint return, you might offset up to $25,000 of ordinary income, given you meet the "active participation" test. Once your adjusted gross income exceeds $100,000, the deduction phases out. Salaried workers should track their AGI closely to see if they qualify for this benefit.
STATE AND LOCAL TAXES
Many states tax rental income like the federal government does, but some add extra requirements:
- California: Requires a real property tax return (Form 593) if you own a rental in the state
- New York: Requires a separate filing for rental income and may impose local taxes in certain areas
RECORD KEEPING BEST PRACTICES
- Keep a separate bank account for rental income and expenses
- Keep receipts, invoices, and bank statements in electronic form
- Keep a mileage log when driving to the property for repairs or tenant meetings
- Keep a calendar of major repairs and improvements; this helps with depreciation calculations
- E‑file – Most taxpayers file electronically, which speeds up processing and reduces errors.
- Schedule E – Double‑check that your income and expenses balance.
- Tax Software – Many programs have a "Rental Property" module that automates depreciation and expense tracking.
- Professional Advice – If your rental income is substantial or you’re unsure about the passive activity loss limits, consult a CPA who specializes in real estate taxation.
- Mixing Personal and Rental Expenses – Personal utilities or mortgage payments must be split if they serve both personal and rental purposes.
- Improvement vs. Repair – Adding a new bathroom is an improvement, thus depreciated, not deducted in the purchase year.
- Unreported Security Deposits – Holding a security deposit that is not returned counts as income.
- Failure to File Schedule E – Not filing this form can lead to penalties and increased IRS scrutiny.
Side rentals can enhance a salaried worker’s income, though they involve tax obligations that differ from your regular paycheck. Reporting rental income accurately, using legitimate deductions, and staying organized keeps tax liability low and prevents costly errors. Maintain tidy records, watch passive loss limits, and, if uncertain, seek professional advice to keep your side rental profitable and compliant.
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