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

The IRS tax filing deadline for the 2023 tax year is April 15th, 2024. With this deadline fast approaching, there’s no better time than now to start getting your records in order.

The first thing you need to do is to make sure you have a solid understanding of your tax requirements, from key dates to the rental income tax rates.

Alongside this you should ensure you've got accurate and up to date records of all of your income and expenses so that you know what numbers you're working with and can calculate how much tax on rental income you're liable to pay.

Once you've got those things you can begin exploring tax strategies that might be able to further reduce your tax bill in the coming years.

In order to make your rental accounting as easy as possible and help you maximize your portfolio ROI we created Landlord Studio property managemenbt and accounting software. Track income and expenses, reconcile transactions with a click, digitize receipts, and instantly generate customizable reports including a P&L and Schedule E.

Create your free account and find out how Landlord Studio can help you streamline tax season.

Key takeaways

• Rental income is generally taxed as ordinary income and needs to be reported in full.
• There are 7 tax brackets between 10% and 37%.
• You must include all sources of income generated through the property, not just rent, when declaring your income.
• You can offset taxable income with deductions including expenses such as, mortgage interest, maintenance costs, and depreciation.
• In order to maximize your deductions and minimize tax liabilities you should use a software like Landlord Studio.

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, 2023 federal income tax brackets have been adjusted and the standard deduction increased to $13,850 for single filers and $27,700 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.

For example, if we refer to the tables below, if you are a single filer in 2023 with a total taxable rental income of $50,000, you would sit in the 22% tax bracket which would look like this:

• 10% for the first $11,000 of your income — which comes to $1,100.
• 12% for any income between $11,001 to $44,725 ($33,724) — which comes to $4,046.88
• 22% for the remaining income between $44,726 - $50,000 - which comes to $1,160.06

This would mean you're paying $5,146.88 plus 22% of the amount over $44,725 ($1,160.06) and your total tax bill would be $6,306.94.

Christanne Wright, real estate CPA, explained that the taxation of “rental income is typically considered ordinary income, and it's subject to federal and state income taxes. This means that the rental income you receive from your properties needs to be reported on your tax return."

However, as rental income is deemed passive income by the IRS it needs to be reported separately from ordinary W-2 income. Most real estate investors will need to file a Schedule E which is the part of the form 1040 that deals with supplemental income and loss, such as rental income and royalties.

The 2023 and 2022 income tax brackets have been included below for reference.

Rental income tax rates

2023 income tax brackets

2022 income tax brackets

Calculating Rental Income Tax

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 Expenses

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

For more information read A Breakdown of your Schedule E Expense Categories

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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 income and expenses in real time throughout the year. It's easier to record one expense that happened last week than record a hundred expenses that happened six months ago.

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 2023

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 2023 tax rates table, the taxable rental income of $8,100 falls within the first tax bracket (10% up to the first $11,000). If this is the only income the landlord receives, they will have to pay $810 in tax.

However, if, for example, they have a day job that pays $89,000, the rental income would go on top of this meaning their total taxable income for the year would be $97,100.

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 2023 must be under $364,200 for someone married filing jointly, or $182,10 for single 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

Reporting Taxable Rental Income & Expenses at Tax Time

You may need to file several rental tax income forms, even if your property is not for personal use.

The main form that owners of rental properties will need to file is a Schedule E form, which you file with your 1040. You report all your income and rental expenses on this form. If you have any personal expenses associated with your rental property, you may be able to deduct some of them using a Schedule A form.

For depreciation and improvements to your property use Form 4562. This allows you to report depreciation from the year you began leasing your rental property. Note that you’ll only be able to deduct a percentage of expenses in the year you incur them.

Finally, if net investment income tax applies to your rental income, you need to file Form 8960. Working through the form will show you if this form applies to your situation.

You may also be required to file a 1099 if you have paid any contractors over $600 during the tax year.

Find out more about required Landlord tax documents: Everything you need to know.

Tracking Rental Property Income and Expenses

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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