How to Calculate Taxable Income on Rental Properties
Determine whether you want to be a cash basis or accrual method taxpayer., Add up all sources of income from your rental properties., Enter that total on Line 3 of your Schedule E, after "Rents received.", Gather and categorize expenses you've...
Step-by-Step Guide
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Step 1: Determine whether you want to be a cash basis or accrual method taxpayer.
The cash basis is the more common method.
With a cash basis method, you report rental income that you actually receive during the tax year.
With an accrual method, you report rental income based on when you earn it. -
Step 2: Add up all sources of income from your rental properties.
This includes rent, advance rent and the following:
Fees paid to cancel a lease; Utilities and other expenses paid by the tenant; Services or property you received for rent instead of cash; and Security deposit amounts that you decide to keep, usually at the termination of the lease.This does not include security deposits you receive and intend to return to the tenant at the termination of the lease.
If you receive a security deposit of first and last months' rent, those amounts should be included in your gross income if they are intended to cover rent for those months., You can list rental income for as many as three properties on a single Schedule E.
The schedule provides three columns for each of the three properties.
Make sure the physical addresses you list under 1a match up with the rents.For example, suppose you own houses for rent on 123 Main Street and 345 Mulberry Street.
You list the Main Street house next to "A" and the Mulberry Street house next to "B." When you fill in your income, make sure you put the rent you receive for the Main Street house in column A and the Mulberry Street house rent in column B.
For the purposes of the example, assume you received $100,000 in rent for the house on Main Street, and $80,000 in rent for the house on Mulberry Street.
If you have more than three rental properties you must use an additional form. , The expenses on Schedule E are broken up into specific categories such as advertising, management fees, repairs, supplies, taxes, and utilities.
Add up your expenses for each category, then put that amount in the correct box.
As with income, make sure you're matching up the correct expenses in the column for the correct property, if you have more than one property listed on the schedule., While repairs such as painting or replacing a roof can be deducted all at once, improvements such as adding a swimming pool or installing new insulation generally must be depreciated over several years rather than deducted in the year you paid for them.Generally, you need to take your cost or other tax basis for the property, allocate that cost to the different types of property included in your rental, and then use the rates, methods and useful lives specified by the IRS for those types of property to find your annual depreciation.
For example, residential real estate is depreciated using the straight-line depreciation method, and has a useful life of
27.5 years.
So if you bought your rental house on 123 Main Street for $200,000, your depreciation deduction would be $7,273 a year ($200,000 /
27.5).
Property such as fences or furniture typically is depreciated using the declining balance method.
The IRS indicates you should depreciate furniture using 200 percent declining balance.
To find your yearly depreciation, refer to the declining balance tables published by the IRS., You would enter that amount on Line 20 in column A.
If you had $80,000 in expenses for your Mulberry Street house, that amount would go on Line 20 in column B. , If the amount is negative, you have a loss on your rental property.
You will have to consult other forms to determine if your losses are deductible., If you have losses, they should not be included on this line.
For example, since you received $100,000 in rent for your Main Street house, but only incurred $50,000 in expenses, your income on the Main Street house is $50,000.
Since your income and expenses for the Mulberry Street house are exactly the same, you have no rental income for that property. , This includes any deductible rental real estate losses you entered on line 22 after calculating passive activity losses using Form
8562.
Passive activity losses are complicated, but generally, you can deduct as much as $25,000 a year in losses on rental properties if you have an adjusted gross income of less than $100,000., This amount is your total taxable rental income, and should be included on your
1040.To finish the example, your total taxable rental income for your two houses on Main Street and Mulberry Street would be $50,000. -
Step 3: Enter that total on Line 3 of your Schedule E
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Step 4: after "Rents received."
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Step 5: Gather and categorize expenses you've incurred on each rental property.
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Step 6: Calculate any depreciation expenses.
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Step 7: Add all your expenses in each category
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Step 8: including depreciation
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Step 9: and enter the total on Line 20 of your Schedule E.For example
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Step 10: suppose you have expenses totaling $50
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Step 11: 000 for your Main Street house.
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Step 12: Subtract your total expenses on Line 20 from your total income on Line 3
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Step 13: and enter the result on Line 21.Generally
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Step 14: this amount will be your taxable income from your rental property.
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Step 15: Enter any positive amount from Line 21 on Line 24.
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Step 16: Enter any losses on Line 25.
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Step 17: Add Lines 24 and 25 and enter the result on Line 26.
Detailed Guide
The cash basis is the more common method.
With a cash basis method, you report rental income that you actually receive during the tax year.
With an accrual method, you report rental income based on when you earn it.
This includes rent, advance rent and the following:
Fees paid to cancel a lease; Utilities and other expenses paid by the tenant; Services or property you received for rent instead of cash; and Security deposit amounts that you decide to keep, usually at the termination of the lease.This does not include security deposits you receive and intend to return to the tenant at the termination of the lease.
If you receive a security deposit of first and last months' rent, those amounts should be included in your gross income if they are intended to cover rent for those months., You can list rental income for as many as three properties on a single Schedule E.
The schedule provides three columns for each of the three properties.
Make sure the physical addresses you list under 1a match up with the rents.For example, suppose you own houses for rent on 123 Main Street and 345 Mulberry Street.
You list the Main Street house next to "A" and the Mulberry Street house next to "B." When you fill in your income, make sure you put the rent you receive for the Main Street house in column A and the Mulberry Street house rent in column B.
For the purposes of the example, assume you received $100,000 in rent for the house on Main Street, and $80,000 in rent for the house on Mulberry Street.
If you have more than three rental properties you must use an additional form. , The expenses on Schedule E are broken up into specific categories such as advertising, management fees, repairs, supplies, taxes, and utilities.
Add up your expenses for each category, then put that amount in the correct box.
As with income, make sure you're matching up the correct expenses in the column for the correct property, if you have more than one property listed on the schedule., While repairs such as painting or replacing a roof can be deducted all at once, improvements such as adding a swimming pool or installing new insulation generally must be depreciated over several years rather than deducted in the year you paid for them.Generally, you need to take your cost or other tax basis for the property, allocate that cost to the different types of property included in your rental, and then use the rates, methods and useful lives specified by the IRS for those types of property to find your annual depreciation.
For example, residential real estate is depreciated using the straight-line depreciation method, and has a useful life of
27.5 years.
So if you bought your rental house on 123 Main Street for $200,000, your depreciation deduction would be $7,273 a year ($200,000 /
27.5).
Property such as fences or furniture typically is depreciated using the declining balance method.
The IRS indicates you should depreciate furniture using 200 percent declining balance.
To find your yearly depreciation, refer to the declining balance tables published by the IRS., You would enter that amount on Line 20 in column A.
If you had $80,000 in expenses for your Mulberry Street house, that amount would go on Line 20 in column B. , If the amount is negative, you have a loss on your rental property.
You will have to consult other forms to determine if your losses are deductible., If you have losses, they should not be included on this line.
For example, since you received $100,000 in rent for your Main Street house, but only incurred $50,000 in expenses, your income on the Main Street house is $50,000.
Since your income and expenses for the Mulberry Street house are exactly the same, you have no rental income for that property. , This includes any deductible rental real estate losses you entered on line 22 after calculating passive activity losses using Form
8562.
Passive activity losses are complicated, but generally, you can deduct as much as $25,000 a year in losses on rental properties if you have an adjusted gross income of less than $100,000., This amount is your total taxable rental income, and should be included on your
1040.To finish the example, your total taxable rental income for your two houses on Main Street and Mulberry Street would be $50,000.
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Nicole Pierce
Brings years of experience writing about practical skills and related subjects.
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