Taxpayers calculate and report rental income on Schedule E, Supplemental Income and Loss. Any rental expenses a taxpayer incurs reduce rental income and total tax owed. Like wages from a job or interest from a bank account, rental income is taxed at ordinary tax rates. Rental losses, however, don't always reduce taxable income.
Passive Activity Losses From Rentals
Normally, a net loss reduces taxable income. However, the IRS considers rental income to be a form of passive income. Because of that, rental losses can't always be used to offset income from other areas.
The IRS states that taxpayers with a modified adjusted gross income less than $100,000 can deduct up to $25,000 of rental losses annually. This deduction phases out completely once a taxpayer has a modified adjusted gross income of $150,000.
Calculate Rents Received
Record total rent received from tenants on line 3 of Schedule E. Rent received is anything you were given for use or occupancy of the property, including advance rent payments and security deposits used as a final rental payment. If you failed to return any security deposit to a tenant, include that as income as well. Don't include refundable deposits as rents received if you plan on returning it to your tenant.
Determine Rental Expenses
To reduce the tax you owe, record any rental expenses you incurred during the year under the Expenses section. Common rental expenses include:
- Repairs and maintenance
- Landscaping and yard maintenance
- Advertising fees
- Background check and credit check fees
- Legal and accounting expenses
- Mileage expense for visiting the rental
- Any utilities paid
- Property tax
- Mortgage interest expense
- Property management fees
- Homeowners and rental insurance
- Depreciation expense
If you have any expenses, include them in line 19 and list the nature of the expenses.
Calculate and Record Rental Income
Subtract line 25, total losses, from line 24, total income, to determine your net rental income for the year in line 26. If the number is positive, you have net rental income for the year. A negative number means that you have a net rental loss. Record the figure on line 17 of Form 1040.