Do I Need to Pay for Rental Property Taxes?

Rental Property

From scheduling home repairs to keeping up with tenants, property owners who rent out their buildings have lengthy to-do lists. When tax season approaches, that list can grow even longer. Here’s some information to help guide you through the season.

Do You Need to Pay Rental Property Taxes?

If you make money from your rentals – even short-term rentals – that income is considered taxable. You’ll need to fill out Schedule E (Supplemental Income and Loss) along with Form 1040 (U.S. Individual Income Tax Return). Higher income taxpayers should expect to pay a 3.8 percent Medicare surtax on top of Denver rental property taxes.

Unsurprisingly, this can be a lot to keep track of, so check with a tax advisor to ensure you’re not underpaying. Underpaying on your taxes can lead to costly penalties down the road.

What Exactly Is Taxable?

Renting out property involves plenty of monetary transactions. Which transactions are considered taxable according to the IRS?

Money you receive as standard rent payments is taxable. In addition, any advance rent the tenant pays you is also taxable.

Security deposits can be tricky. Security deposits that will serve as a final payment on the lease fall into the category of advance rent. However, if you plan to return the security deposit at the end of the lease, that deposit isn’t taxable. If you keep part of the security deposit due to a tenant breaking the terms of the lease, the amount you keep becomes taxable.

If the tenant pays you with a service, rather than in money, the value of the service should be reported as rental income. For example, a tenant may offer to paint the property or perform repairs in exchange for a discount on rent.

If the tenant pays any of your expenses, you must include them in your rental income. The good news is that some of these expenses may be deductible.

What Is Deductible?

You can deduct certain rental expenses on your return. Here are just a few of the potential deductions:

  • Advertising efforts
  • Depreciation
  • Insurance
  • Mortgage interest
  • Property tax
  • Repairs
  • Supplies needed for maintenance

For a more comprehensive list of deductions, you’ll need to reach out to a tax expert and ask them to review your specific circumstances. You might be surprised to find that you’ve been missing out on large deductions.

Denver Tax Advisor can offer expert guidance to rental property owners when tax season rolls around. Property owners aren’t the only ones who can rely on us for help. We can also offer advice to business owners who need help with tasks such as reporting deductions and preparing various tax documents. Just starting a small business? We can ensure you get off on the right foot when it comes to tax planning and prep. Lastly, we’re also able to help individuals get a grip on personal taxes. Personal taxes can be especially tricky when you have to handle issues such as trusts and estate taxes or demands from the IRS.