What You Need to Know about Rental Property Taxes

Did you finally decide to rent out your house to make extra money? However, before you go about doing that and becoming first-time landlords, there are many things you need to consider and understand first. For instance, have you ever asked yourself if the rental income you're about to make is taxable? Well, the answer to that is yes, it is taxable. If you didn't know that, you're not alone. Many other taxpayers find themselves in similar situations faced with the same challenges, but fortunately for you, you're here today!

Today, let us talk about rental properties and all the tax-related things you need to know about them:

Do I Owe Rental Income Tax?

If you are a landlord and make rental income from your property, you likely do owe rental income tax, as we've already mentioned. As a matter of fact, it's important to remember that any income you make from your properties (whether passive or active income) is taxable.

Are Security Deposits Taxable?

If you've decided to take the next step and rent out your house, the next thing to consider would be related to the security deposit that tenancy agreements often require. If the tenant agrees to pay a security deposit and they service your property, then they are paying you a non-refundable sum of money every month, which is taxable.

The portion of the security deposit that is used for repairing or improving your property is also taxable. However, you can deduct the repairs and improvements from your taxes if you are able to itemize your deductions.

Is There Anything I Can Deduct?

The good thing is that you can deduct the rental expenses you'll be incurring from your rental income tax. These expenses can include things such as utilities, internet costs, cleaning supplies, and more—the things you invested in to make the rental property happen.

That being said, the expenses you can deduct will depend on the property's classification. For instance, if you are renting out a room in your house, you can't deduct mortgage interest, property taxes, insurance costs, repairs, and maintenance, or depreciation from the rental income tax. That's because these costs affect the whole house, and any costs that aren't room-specific aren't really deductable. However, there is an exception. If that room is part of a multi-unit building, meaning that essentially the whole building's rooms are rented out, you can deduct from those.

As a quick tip, be sure to keep track of your rental income and expenses in case you need to prove to your tax preparer that your rental income is indeed taxable.

Conclusion

As a landlord, you should know that it's important to understand the tax implications of renting out your property. You'll need to know about how it is taxable and what you can deduct from it, after all. This ensures that you stay out of trouble with the IRS when tax time arrives, and it also helps you understand where you can deduct from to maximize savings and, as a result, your extra income.

Tottax is a tax and accounting agency offering various individuals and organizations the services they need to overcome their accounting issues. If you need rental property tax services in Denver, reach out to us today!