Tax On Rental Income: How Much Tax Do You Owe?

Having a clear understanding of how to track and report rental income will make this year’s tax season a breeze.

The IRS tax filing deadline for the 2022 tax year is April 18, 2023. With this deadline on the way, there’s no better time than now to start getting your records in order. One of the most important things to get right, to ensure you maximize your returns, is calculating taxes on rental income.

If you’ve been using rental accounting software like Landlord Studio, this process will be a lot easier.

Tax on rental income: how it works

The IRS defines rental income as any payment you receive for the use or occupation of property. Unless you are filing as a corporation (eg. an LLC or S-Corp) rental income is taxed at your standard income tax rates. And may be owed at both a state and federal level unless you’re in a state with no income tax.

Taking inflation into account, 2022 federal income tax brackets have been adjusted and the standard deduction increases to $12,550 for single filers and $25,100 for joint filers.

The marginal tax bracket you are in, of which there are 7 between 10% and 37%, depends on your filing status and the amount of taxable income you report for the year. So referring to the table below, if you are a single filer in 2022 with a taxable rental income of $50,000, you will pay 22% tax. The 2021 brackets have also been included in a second table for your reference.

2022 income tax brackets

2022 Tax Rate Single Filers Married Couples Filing Jointly
37% $539,900 $647,850
35% $215,950 $431,900
32% $170,050 $340,100
24% $89,075 $178,150
22% $41,775 $83,550
12% $10,275 $20,550
10% > $10,275 > $20,550

2021 income tax brackets

2021 Tax Rate Single Filers Married Couples Filing Jointly
37% $523,600 $628,300
35% $209,425 $418,850
32% $164,925 $329,850
24% $86,375 $172,750
22% $40,525 $81,050
12% $9,950 $19,900
10% > $9,950 > $19,900

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Calculating rental income

When calculating rental income tax, there are several types of income to include. Some examples of these are:

  • Rent received over the tax year
  • Advanced payments of rent that you receive.
  • Fees from tenants (e.g. early termination fee, late fees, pet fees).
  • Any non-refundable security deposit that you keep.
  • Expenses paid by your tenants to the landlord.
  • Services in lieu of rent eg. if a tenant works on the property for a reduced rent amount.

Calculating Rental Property Expense

When tracking rental property expenses throughout the year, or more specifically, when filling out a Schedule E form during tax season, expenses need to be broken down by property and into specific categories. Common rental property expenses that can be deducted in any given tax year include:

  • Advertising and marketing
  • HOA dues
  • Insurance
  • Leasing commissions
  • Licenses and permits
  • Materials and supplies
  • Mortgage interest
  • Professional fees such as legal and accounting
  • Property management fees
  • Property tax
  • Repairs and maintenance
  • Travel
  • Utilities

Tracking your income and expenses throughout the year

Once you have a clear picture of your rental income and expenses, you will need to deduct your expenses from your income to determine your taxable income. Rather than waiting until the end of the tax year to do this, it’s a good idea to track your ingoings and outgoings throughout the year.

Using a rental accounting solution such as Landlord Studio will enable you to digitize your receipts, categorize your expenses and keep them updated on the go. Bank feed integration will save you time too, as you aren’t having to manually input data. At the end of the tax year, you can give your accountant view-only access to your data, so they can see the reports that are useful for them.

Consistent record-keeping may seem like a hassle when you’re in the moment but will pay off in the long run. Even if you aren’t using a property management software solution, make sure you are at least using a spreadsheet that contains all of the necessary information. Your CPA will thank you for being organized for the duration of the year.

Calculating your rental income tax

Tax rates for rental income 2021/22

An Example

Total Annual Rental Income: $24,000

Mortgage Interest: (-$8,000)

Insurance policies: (-$1,500)

Property Management Fees: (-$2,400)

Property Taxes: (-$3,000)

Other Deductible Expenses: (-$1,000)

Total Expenses: (-$15,900)

Taxable Rental Income (income – expenses): $8,100

Referring back to the 2022 tax rates table, the taxable rental income of $8,100 falls within the first tax bracket (10%). If this is the only income the landlord receives, they will have to pay $810 in tax.

If, for example, they have a day job that pays $89,000, this additional income will put them in the fourth bracket (24%).

Using Depreciation to Reduce Rental Income tax

Depreciation is the process of deducting the value of an asset, in this case, your property and any improvements made to it against your taxes over its useful lifetime. Think of it as compensation for the wear and tear on your rental property.

It is calculated depending on the useful lifespan of the asset, which is set by the IRS. For residential rental properties, this is 27.5 years, so depreciation will be calculated by taking the value of the property and dividing it by 27.5.

Understanding this is key when it comes to tax season, as depreciation reduces the amount of tax you pay via tax deductions.

Qualified Business Income (QBI) Deduction

QBI is a tax break that allows self-employed and small business owners to deduct up to 20% of their business income from their taxes (after depreciation).

In order to qualify, the total taxable income in 2022 must be under $164,900 for single filers or $329,800 for joint filers. Exclusions include passive rentals which aren’t considered a trade or business and properties that are used as a residence by the taxpayer at some point during the year.

Even if you do not qualify as a real estate professional, you can still qualify for the QBI deduction as long as your rental activities are classified as business activities.

Examples of rental services that constitute business activities:

  • Property management activities
  • Tenant screening and selection
  • Rent collection
  • Maintenance of property
  • Listing the property for rent

Activities not included:

  • Financial management
  • Finding properties to rent
  • Time spent traveling to and from the rental property

Tracking and Reporting Rental Income and Expenses for Tax Time

Having a clear understanding of how to track and report rental income will make this year’s tax season a breeze. Make the most of purpose-built software like Landlord Studio, which exists to make your job as a landlord more efficient and will help you with all aspects of rental property accounting, from income and expense tracking to tax reporting.

Landlord Studio allows you to customize and generate a number of reports such as the Schedule E 1040 report and supplier expense reports, designed to make tax time as simple and stress-free as possible.

For further clarification regarding rental income tax, calculating depreciation, and QBI deduction, talk to your accountant or CPA.

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