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
- 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.If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).