Am I required to report and pay taxes on income from rental activity?
Generally speaking, if you are making money from operating a rental property, or engaging in almost any business activity for that matter, then, yes, you are required to report and pay taxes on that income. Rental activity creates taxable income in a majority of cases. The only exception to this rule is if you rent out your primary residence, such as renting out a bedroom for fewer than 15 days during the tax year. No income is required to be reported in that case.
However, if you rent out your primary residence for longer than 15 days or have a vacation or investment property, you are required to report and pay taxes on the net rental income. In most cases, rental income is considered investment income and it doesn't trigger self-employment tax like a side hustle might. However, if you are a real estate professional or looking to make rental activity a full-time gig, you may have to pay self-employment tax in addition to income tax. In some cases, you may be able to avoid this tax by forming a corporation or LLC.
What types of expenses can I deduct as a landlord?
You can deduct expenses associated with rental activity if they are required to maintain the property, find a tenant, solve disputes, comply with the law, and other aspects of collecting rent and keeping your investment safe. The following items are generally deductible:
- Advertising your rental through property listings, websites, and other methods.
- Legal and professional fees.
- Property management fees.
- Insurance.
- Mortgage interest and real estate taxes.
- HOA or condo board maintenance fees.
- Repair and maintenance labor costs.
- Purchase, installation, and maintenance of appliances and furniture.
- Supplies used to get the property in move-in condition.
- Collection agency fees.
- State and local taxes on rental activity.
- Utilities.
Businesses may be able to write off costs from improving their facilities immediately rather than having to depreciate them over time. What may qualify for a write off, however, can be complex. If you let your tax professional know which improvements were made over the last few years, they can evaluate whether you may accelerate the depreciation or write off the cost.
If the property is unoccupied and it takes longer to get a tenant than you anticipated, you cannot deduct the rent that you would have received. You only report the rent that you eventually do receive, but you can deduct the marketing expenses related to attempts to obtain tenants. You can also deduct the operating and maintenance expenses in the time that the property was vacant but available for rent.
If the property does not meet building codes or a complaint is filed against you and the state or city takes action, you cannot deduct any fines or penalties. Only fees paid to attorneys, accountants, and other compliance professionals are deductible, along with local taxes and the labor costs involved in repairing the property.
If my rental activity results in a loss, can I deduct it?
Most small landlords have a limit on the amount of rental losses that they are allowed to deduct. Specific rules apply for losses from passive rental activity if you are not a full-time real estate professional, such as a realtor or property manager. Additionally, there are limits on your rental loss if you are renting out your primary residence (or put any other property to personal use). If you have losses, it is still important to let your tax professional know.
Do landlords have to issue 1099 forms to contractors?
Form 1099-NEC is used to report payments made to contractors during the tax year. Payments can include fees for one-time services such as fixing a burst pipe or ongoing fees like lawn care or housekeeping for your rental units. If you paid the contractor more than $600, you may be required to file a 1099-NEC. Generally speaking, if you made payments to corporations, paid using a payment processor like PayPal, or hired the contractor through a third-party platform, you do not have to file 1099s for those payments. If you have hired a property management company, the property manager may handle the 1099s for you, but it is important to confirm this so as to not miss the deadline at the end of January each year.
What tax deadlines do I have as a landlord?
Your tax deadlines may vary depending on your business structure. Here are a few key deadlines to know for next year:
January 31, 2024:
- Form 1099-NEC.
March 15, 2024:
- Form 1065 (multi-member LLC, LLP, or partnership).
- Form 1120-S (S-Corporation).
April 15, 2024:
- Form 1040 (individual tax return, including income from a single-member LLC, sole proprietorship, or unincorporated business).
- Form 1120 (C-Corporation).
There may also be additional state and local deadlines for rental taxes, as well as self-employment taxes and quarterly estimated tax payments if you are a full-time, self-employed real estate professional. An attorney or tax professional can help you determine all the deadlines and forms that apply to your specific situation.
How can I get help?
Despite rents increasing across most of the country, 2023 still brought challenges for many landlords. The costs for goods and services continued to rise. Rising interest rates also increased mortgage costs for some landlords and made financing improvements more costly.
If you have more questions about managing your rental business, or how to report your rental income and expenses, reach out to a Rocket Lawyer network attorney for affordable legal advice. Want to leave figuring out complicated tax credits and deductions to the pros? Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services. Leave your taxes to a pro.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
