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Rental Property Income Taxes and Deductions

As tax season is coming up, I've had a few readers email me about how income taxes are calculated with investment rental properties.  It's actually a pretty basic calculation, with your total NET rental income added to your regular income throughout the year.  The basic formula works out like this:

Total Rental Income – Expenses = Net Rental Income

Total Rental Income is self explanatory, but what is considered an expense?   Listed below are the expenses that are tax deductible:

  • Mortgage Interest (from your annual statement)
  • Property Taxes
  • Insurance
  • Maintenance/upgrades
  • Property Management
  • Utility bills (if you include them in the rent)
  • Office supplies
  • Car (there are exceptions)
  • Internet connection, telephone, cell phone (portion used for business)

For example, my rental property brought in around $10,000 in rent last year, with expenses listed above totaling around $8000.  In my case, $2000 was added to taxable income for the year.  At the 40% tax bracket, I would pay $800 in taxes for the year. 

What if I had a loss?  No problem, this amount is subtracted from your other sources of income that are taxable for the year. So say that I had a $2000 loss instead of a gain. Providing that I paid in taxes from other income sources throughout the year, I would get back an extra $800 during tax refund season.     

What if you live in a 2 unit home and you live in one of them?  In this case, you can still deduct mortgage interest and property taxes, but only a percentage of it.  The percentage depends on how much space you have rented relative to the size of the building.

There you have it, a basic explanation of how rental property income tax is calculated.  Please note that I'm not a tax professional so take the information above as a primer for your own research.  I would recommend that you contact a tax professional before calculating your deductions.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 165 comments… add one }

  • Dr. Philosophy February 27, 2015, 6:59 pm

    @ Oilrental —
    I suspect it would be considered income if the cash received is not equity. Getting a cash back mortgage is a way to make money. Just like rewards points are a form of income if they are ‘earned’ on business expenses.

  • Dr. Philosophy February 27, 2015, 7:03 pm

    @ Candy —
    It depends on what sense of ‘can’ you are working with. Of course you can in a sense write down whatever the heck you want on your tax return. No one will stop you.
    On the other hand, I suspect you mean “Will I be able to make a claim for expenses when I don’t have any shred of evidence that I paid, without bad consequences”. I think you can see pretty clearly that the answer to that is “no”.

  • Shaw October 8, 2015, 6:42 pm

    Hi, I’m a little confused on the “The percentage depends on how much space you have rented relative to the size of the building.” part.

    Let’s say you have a roommate who you rented one room to, but he also have access to the common areas – living room, kitchen, washroom; then do I only get to deduct mortgage relative to the size of that one single room vs the single room + half of the common area?

    The latter arrangement seems much more fair.

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