How Is Rental Income Taxed? A Landlord’s Guide to Rental Income Tax Rules

Owning a rental property business provides an opportunity to generate passive income. But did you know that the IRS taxes the income produced by your rentals? While the IRS generally taxes rental income as ordinary income, the amount you owe depends on several factors, including your taxable income and eligible deductions. So, how is rental income taxed? Continue reading to learn more about rental income – what it is, how it works, and how to lower your rental income tax.  

Key Takeaways 

• Landlords must report various forms of rental income, including rent payments, late fees, pet rent, lease termination fees, advance rent, retained security deposits, tenant-paid expenses, and even certain non-cash payments received in exchange for property use. 
• The IRS typically treats rental income as ordinary income, meaning it is combined with your other taxable income sources and taxed according to your applicable federal income tax bracket. 
• Landlords can lower their tax burden by claiming eligible deductions such as mortgage interest, operating expenses, and depreciation, helping improve overall investment returns. 

What Is Rental Income? 

Based on our experience in Atlanta property management, we know that rental income is the revenue your rental property business generates. In particular, rental income covers all the payments a landlord or owner receives for letting someone use or occupy their property.  

The most common examples include rent payments, late rent fees, pet rent, lease termination fees, and parking fees. But aside from these usual rent payments, there are other forms of payments that count as rental income, including advance rent payments, retained security deposits, tenant-paid expenses, and services or property received.  

How Is Rental Income Taxed? 

Now that you have a better understanding of what rental income is, let’s talk about how rental income is taxed. Following federal regulations, rental income is generally taxed as ordinary income. Under IRS guidelines, this means that it is calculated along with your other sources of taxable income, including wages, investment earnings, retirement distributions, and the like.  

Aside from this, another key element in rental income taxation is that income is categorized and taxed based on the applicable federal income tax bracket. Federal income taxes use a progressive tax system, meaning different portions of your income may be taxed at different rates. But even if your income increases and jumps to a higher tax bracket, you are only required to apply the higher tax rate on the amount that’s in the new bracket. 

For example, let’s say that you own a single rental property while you continue to work a full-time corporate job. In such cases, your total ordinary income will consist of your net rental income plus the salary from your full-time work. Suppose you earn $85,000 from your full-time job and have $20,000 in net rental income. The rental income generally contributes to your overall income for federal tax purposes. However, your final taxable income will depend on deductions, adjustments, filing status, and other factors. Do keep in mind that policies regarding tax rates may change, so it’s important that you stay up to date to know which tax rate will apply during filing. 

Do You Have to Pay State Taxes on Rental Income? 

So far, we’ve covered rental income taxation on the federal level. But what about state taxes on rental income? Depending on the jurisdiction, landlords may also owe state income tax on their rental income. In some states, such as Texas, Florida, and Tennessee, rental income is not subject to state income taxes. However, others tax rental income as part of state taxable income. At the same time, some local taxes may also apply in certain cities. 

For rental owners in Atlanta, Georgia’s state income tax may also apply to rental income. Georgia uses a flat individual income tax rate, rather than the graduated federal income tax brackets. However, instead of a tax bracket, state regulations follow a flat income tax rate of 4.99%.  

As a result, landlords should account for both federal and state income taxes when estimating annual rental profits and planning for tax season. 

Can You Avoid Paying Tax on Rental Income? 

Taking into consideration what rental income is and how it works, this brings us to the question: can you avoid paying tax on rental income? Generally, you can’t simply avoid or refuse to pay taxes. In fact, even failing to report all of your rental income properly and accurately may result in penalties, added interest on your tax payments, or even potential audits. 

With this in mind, you can’t generally avoid paying rental income taxes legally. However, landlords can legally lower their taxable income by taking advantage of eligible deductions. Essentially, eligible deductions reduce your taxable rental income, which may lower the amount of tax you owe. 

But to do so, you need to have accurate records of your expenses, which can be tedious and, at times, confusing. That is why we also highly suggest managing your tax requirements diligently throughout the year to avoid scrambling during the tax filing season. 

Rental Property Tax Deductions You Can Leverage 

As a landlord, you are required to process and pay your rental income tax promptly and properly. But did you know that there are ways for you to potentially lower your tax obligations, primarily through deductions? These deductions reduce your taxable rental income, which may lower the amount of tax you owe.  

In most cases, landlords pay taxes on their net rental income after eligible deductions rather than the total rent they collect. Here are some of the most common deductions: 

• Mortgage interest: Interest paid on a mortgage or other loan used for the rental property may generally be deductible as a rental expense, subject to applicable tax rules.

• Property depreciation: Depreciation generally allows landlords to recover the cost of qualifying rental property and certain improvements over a prescribed period rather than deducting the entire cost at once.

• Rental expenses: Many expenses associated with operating your rental property are deductible. This includes: 
  • Insurance premiums 
  • Repair and maintenance costs 
  • Utilities 
  • Property management fees 
  • Property taxes 
  • HOA dues 
  • Legal and accounting fees 
  • Advertising costs 
  • Travel related to managing the property (when allowed) 
  • Office supplies 
  • Professional services 

FAQs About Rental Income Tax

For some, navigating rental income property taxes can be confusing. So, to better understand how rental income is taxed, let’s go over some of the most commonly asked questions about rental income taxation. 

Does rental income count as earned income?

Rental income is generally not treated the same as wages or other earned income. For passive activity loss purposes, rental real estate activities are generally considered passive, although exceptions apply. For example, different rules may apply to qualifying real estate professionals or rental activities involving substantial services.

How do I report rental income and expenses? 

Rental income and expenses are generally reported on Schedule E (Supplemental Income and Loss), which is filed with IRS Form 1040. This report lists all of your rental income received and also itemizes deductible expenses to accurately calculate your taxable income. 

What is the rental income tax rate? 

Rental income doesn’t have its own separate federal tax rate. Instead, it is generally taxed as ordinary income using the federal income tax brackets applicable for the tax year. The rate you pay depends on your total taxable income, and many states also impose their own income taxes. 

How Bay Property Management Group Can Help 

As a landlord, understanding what rental income tax is and how regulations apply is the first step in navigating your tax requirements. However, learning about the different ways you can lower your tax obligations while maintaining compliance with tax rules is key to managing your finances and improving your rental’s performance.  

Need help with your rental property? We at Bay Property Management Group are ready to help! We provide quality property management services, use cutting-edge property management technology, and leverage years of experience to provide exceptional support that landlords need. Sounds interesting? Contact us today to learn more!