Tax Tips for New Landlords

Last updated on October 1, 2021

If you have decided to rent out your property, you will be seen as a landlord by the IRS and required to report the rental property in your income tax returns. To reduce your tax burden on property you have put on rent, you can use some tax tips on deductions.

You are required to subtract your expenses from your income received through rental. Expenses can be in the form of property tax, mortgage interest, maintenance costs etc. If your expenses exceed your income from the rental, you will show losses in your tax return and save money on taxes. If you show profit, you will need to pay taxes depending on how much profit you made.

The largest deduction you can make on rental is through depreciation. http://www.foxbusiness.com/personal-finance/2012/09/14/income-tax-tips-for-accidental-landlords/ guides you on how to calculate depreciation:

“It is usually a large amount and can help you greatly decrease the taxes you pay. To figure out this amount, first you need to determine the tax basis and depreciable basis of your rental property. The tax basis will generally be what you originally paid for the property, plus any capital improvements you’ve made over the years. So if you paid $200,000 and put in a $25,000 addition, your taxable basis is $225,000.

You’ll then split that basis into land value and building value, which is your depreciable basis. Divide that building value by 27.5 years to get your depreciation deduction, which goes on your Schedule E just like any other expense. Make sure to have a tax preparer help you with this calculation.”

You can save much tax on your rental if you plan your taxes from the beginning. You can use IRS 1040 Form Schedule E to record your rental income and expenditures. Fox Business explains:

“Now let’s look at how the Schedule E income or loss flows to your main 1040 form. You would take your net income or loss on the Schedule E form and transfer it to your 1040. If it’s a loss, you save money on taxes. If it’s positive income, you pay additional taxes.

Note: On losses there are some “Passive Activity Loss” limitations on using losses to shield income. The net maximum loss you can use to shield income is $25,000, and the ability to use any losses phases out starting at $100,000 adjusted gross income. Real estate professionals, however, may be able to use unlimited losses. Talk to a tax professional on all these issues.”

Your decision to rent your property does not necessarily mean paying of additional taxes. If you plan your taxes from the beginning and/or take professional help, you can save much tax through deductions.