Tax on Renting property as a business
Renting out property is one of the most common ways to earn some passive income as a business owner. All you need to do is to invest in the property itself and to set up a management system for your tenants.
The income that you earn this way will be taxed and you need to be prepared for it, or at least your accounting team does. There are also tax deductions that you can take and use for the necessary work that makes the property rentable.
What’s rental income?
The first thing to define is what rental income actually is and what part of your earnings are taxed. This seems like a simple enough proposition but as you may know nothing about IRS is simple. The rent you collect from your tenants is taxed as rental income as you might have expected, but there’s more to it.
-Any advancement payments are also taxed when you receive them.
-The security deposit you may ask for is taxed when you receive them
-Expenses paid by your tenants if they are not obligated to pay them are also taxed. For instance, this is the case when the tenants pay the bills to you instead of to the companies that provide the utilities.
-Services received from tenants instead of money are also taxed. Mowing the lawn is a good example of this.
Deductibles
There are expenses that are needed for you to run a rental business and they can be deducted from your yearly taxes. If you can prove that these expenses were in fact paid for they are deducted to the fullest. These are mostly about running and maintaining the property which is your main source of income. Such expenses include:
-costs of cleaning and maintaining the property,
-mortgage interest,
-insurance costs,
-money you spend advertising the property,
-payments to a property manager,
-HOA dues or condo fees,
-property taxes services you pay for (such as utilities and pest control),
-and legal and other professional fees related to owning the property.
Depreciation
There’s another deduction you should factor in and that’s the deprecation of the property, meaning the value of the property that’s lost simply due to the passage of time. Commercial properties are deductible over the span of 27.5 years meaning that the value of the property is seen as going down. For a commercial property that time is set at 39 years.
This is one of the most useful deductions you have available and you should consult your accountant in order to get the most out of it as long as you can.
QBI (qualified business income)
There’s yet another tax deduction that you may have right to in some cases and that one is known as qualified business income. This is only available to those that are considered to be qualified businesses and therefore it depends on what kind of business is renting out the property.
If your income comes from partnerships, S corporations, and/or sole proprietorships, it’s probably QBI and you might be eligible for this 20% deduction. There’s also a set of trades that are qualified for this deduction and you should check with your accountant which one of those apply to your case.
Additionally, there’s a limit as to how much you can earn and still get this deduction and that include all your other earnings and not just those coming from the renting business.
How to report this income?
This income needs to be reported on an annual level just like any other income. That’s done by using the form called 1040 Schedule E. On this form you need to list your income, expenses and the deprecation levels you have the right to deduct.
The tax documents that contain this additional piece of paper will be monitored more closely than others because there’s more ways to cheat on this type of taxes. That’s why you need to be extra carefully because it can cause harm with the other taxes you’re paying.
When you rent some of the time
It’s also possible to rent a property out some of the time and use it as seasonal income. If this period is less than 14 days a year there’s no taxes to pay. When you rent the space you’re otherwise using yourself you’ll need to use it at least ten percent of the time in order to treat it as dual use property.
Conclusion
There’s a tax that you pay on the income made from renting out a property. This tax comes with a lot of deductions because there are a lot of expenses that you need to pay in order to run the property and to manage it for rental. It’s a passive income but one that will require some additional paperwork as well.
