Being a landlord entails a slew of financial and legal responsibilities. Here’s all you need to know about rental income taxes, deductions, and relief.
What you will discover:
What tax breaks are available to landlords?
Is it necessary for me to record and pay taxes on rental income?
As a landlord, what expenditures may I deduct?
Can I deduct the loss from my rental activity?
Do landlords have to provide contractors with 1099 forms?
What are my tax deadlines as a landlord?
How can I obtain assistance?
Being a landlord provides amazing prospects for consistent, passive income. It does, however, impose additional financial and legal burdens, particularly with regard to taxation. There are various complexities to how rental income is taxed, and the IRS regards real estate professionals who rent out a home differently from individuals who merely earn extra money through rental activities. Continue reading to find out more about submitting rental income taxes.
Table of Contents
What tax breaks are available to landlords?
While several recent special tax relief programs only apply to the 2020 and 2021 tax years, landlords may still be eligible for some tax reduction in the 2022 tax year. Some of the tax relief adjustments that may benefit you are as follows:
Qualified enhancements
Businesses may be able to quickly deduct the expenditures of renovating their facilities rather than depreciating them over time. What qualifies for a write-off, on the other hand, might be complicated. If you tell your tax expert any modifications you made in the previous few years, they may determine whether you can accelerate depreciation or deduct the expense.
Tax Credit for Employee Retention
If you have workers, you may be eligible for further government assistance. The Employee Retention Tax Credit (ERTC) is a tax credit that may be used to offset certain payroll taxes. The ERTC was enlarged by the American Rescue Plan Act, which was passed in 2021. Some enterprises may still be eligible for the ERTC on salaries paid until the end of 2021. The ERTC is retroactive and may give a significant tax advantage to enterprises employing workers. whether you want to find out whether your company qualifies for the ERTC, consult with a tax specialist.
Refunds for inflation alleviation offered by the state
Several jurisdictions provide refunds and inflation relief payments to qualifying people to help them cope with increasing food, gas, and utility prices. California approved the Middle Class Tax Refund, which gives qualifying citizens of California with a one-time payment of up to $700 for individuals and $1,050 for couples. Other states with comparable inflation relief refunds include Delaware, Illinois, New Mexico, South Carolina, and Virginia.
Is it necessary for me to record and pay taxes on rental income?
In general, if you make money by running a rental property, or practically any other commercial activity, you must declare and pay taxes on that revenue. The bulk of rental activities generates taxable revenue. The sole exemption is if you rent out your principal dwelling, such as a bedroom, for less than 15 days throughout the tax year. In such situation, no income must be declared.
If you rent out your home house for more than 15 days, or if you own a vacation or investment property, you must record and pay taxes on the net rental income. Rental income is generally considered investment income and does not attract self-employment tax, as a side business may. However, if you are a real estate professional or intend to make renting out your home your full-time job, you may be required to pay self-employment tax in addition to income tax. In certain situations, incorporating a company or LLC may allow you to avoid this tax.
As a landlord, what expenditures may I deduct?
You may deduct rental activity expenditures if they are necessary to maintain the property, locate a renter, resolve disputes, comply with the law, and other elements of collecting rent and protecting your investment. In general, the following goods are deductible:
Advertise your rental via property listings, websites, and other channels.
Fees for legal and professional services.
Fees for property management.
Insurance.
Mortgage interest plus property taxes.
Fees for condo or HOA upkeep.
Labor expenses for repairs and upkeep.
Appliance and furniture purchase, installation, and upkeep.
Supplies needed to prepare the property ready for occupancy.
Fees for collection agencies.
Rental activity is subject to state and municipal taxes.
Utilities.
If the property is vacant and it takes longer than expected to find a renter, you cannot deduct the rent you would have received. You only report the rent that you actually get, but you may deduct the marketing costs associated with attempting to find renters. You may also deduct operating and maintenance costs incurred when the property was unoccupied but available for rent.
You cannot deduct any fines or penalties if the property does not satisfy construction regulations or if a complaint is made against you and the state or municipal takes action. Only expenses paid to lawyers, accountants, and other compliance specialists, as well as municipal taxes and labor costs involved in rehabilitating the property, are deductible.
Can I deduct the loss from my rental activity?
Most small landlords have a limit on the amount of rental losses they may deduct. If you are not a full-time real estate professional, such as a realtor or property manager, there are special regulations that apply to losses from passive rental activities. Furthermore, if you rent out your principal dwelling (or utilize any other property for personal purposes), your rental loss is limited. Even if you incur losses, you should still notify your tax expert.
Do landlords have to provide contractors with 1099 forms?
Form 1099-NEC is used to record contractor payments earned throughout the tax year. Payments may include one-time services such as repairing a broken pipe as well as continuing costs such as lawn care or cleaning for your rental properties. You may be required to submit a 1099-NEC if you paid the contractor more than $600. In general, whether you made payments to companies, used a payment processor like PayPal, or engaged the contractor via a third-party platform, you do not need to submit 1099s. If you have engaged a property management business, the property manager may handle the 1099s for you; however, you must confirm this in order to meet the deadline at the end of January each year.
What are my tax deadlines as a landlord?
Depending on your company structure, your tax dates may differ. Here are a few crucial dates to remember for next year:
31 January 2023:
1099-NEC is a tax form.
March 15, 2023:
Form 1065 (multi-member limited liability company, LLP, or partnership).
S-Corporation (Form 1120-S).
April 18, 2023:
Individual tax return, including revenue from a single-member LLC, sole proprietorship, or unincorporated company (Form 1040).
C-Corporation Form 1120.
If you are a full-time, self-employed real estate professional, there may be extra state and municipal deadlines for rental taxes, as well as self-employment taxes and quarterly anticipated tax payments. A tax expert or an attorney can assist you in determining all of the dates and paperwork that relate to your individual circumstance.
How can I obtain assistance?
Despite the long-term consequences of 2020 and 2021, several pandemic-related tax relief schemes are no longer accessible. Rents have been rising over the majority of the nation, but 2022 still presented issues for many landlords. Late rent payments were increasingly prevalent in 2022 as tenants faced financial trouble due to inflation. Furthermore, the exceptionally high inflation rate raised the prices of goods and services. Rising interest rates have also raised some landlords’ mortgage bills and made financing upgrades more expensive.
