How Is Passive Rental Income Taxed

As you can probably tell, owning a home is an expensive habit! While it may be easy to fall into the trap of thinking that your house is your own personal property, this is not always the case.

Most people who rent their homes do so because they are unable to afford or find a place to fit in the budget for a down payment or monthly payments. This makes paying taxes on passive rental income very tricky.

In fact, some tax experts say that being able to determine whether or not your renters’ expenses qualify as business transactions depends entirely upon if you consider yourself rich.

Fortunately, there are ways to mitigate this risk and ensure that you are properly taxed. In this article, we will discuss how.

Passive income

how is passive rental income taxed

What is passive income? That’s a great question! Most people associate the term “passive income” with things like dividend payments, rental income, or social media influencer rewards. But what most individuals don’t realize is that active income is also considered to be a form of passive income.

There are several ways to make money through active means (hence the name!), but only some of them are taxed as such. For example, if you're lucky enough to earn more than $17,550 per year in total revenue, then your employer may pay for you to invest their profit in an IRA account. This is called employee IRAs and they are completely tax-free.

You can contribute up to $5,500 per individual and $11,000 per married couple annually into each individual IRA. The difference between those limits for singles and married couples is just how much room there is in the budget!

The way many high earners manage to surpass those annual spending limits is by investing in both spouses' IRA accounts.

Investment properties

how is passive rental income taxed

Another way to build wealth is investing in real estate. This is typically done through investors, or individuals who own large parcels of land or buildings that they lease out to other companies or individual owners. These landlords earn passive income by charging rent on their property, with most of it going into your savings!

Landlords are taxed like any other business, but how tax is calculated for investment properties varies depending on the country and person doing the taxing. In this article, we will go over some important points about investment property taxation.

There’s no one size fits all solution when it comes to investment property taxes, so feel free to do research however you want! This article only includes information that can be found online freely, not paid services. If you find anything that looks inaccurate or misleading, let us know! We hope you enjoy reading this article as much as we did writing it.

Rent your house

how is passive rental income taxed

As we mentioned before, owning a home is a great way to start investing in your future. However, it’s not for everyone – especially if you are living pay-what-you-want-to-pay right now.

If you would like to invest in a property but don’t want to spend a lot of money on it, then passive rental income may be perfect for you!

Passive rentals are pretty simple to manage. You create a website or app that lists out and market your properties (or at least one of them). Then users can browse through your listings, look at the pictures, etc.. If they wish to make an inquiry about the property or talk with you about the property, it’s done via chat or call apps like Skype or WhatsApp.

This article will go into more detail about how tax obligations differ between having a residential rental property and earning passive income through a listing site.

Rent your apartment

how is passive rental income taxed

As with any income, how passive or active you are in regards to rental income is important when it comes time to pay taxes. If you choose to be more actively involved in rentals, then you will need to report this information as well as itemize deductions during tax season.

On the other hand, if you prefer to just own real estate and let things run their course, you can be much less busy with rents and business reports, etc., which reduce potential stress for you during tax time.

Fortunately, there are some tricks savvy investors use to remain tax neutral while still making good money off of renting out an apartment or house. Here are five such strategies.

1. Use The Same Budget To Calculate Net Profit

Many people find that instead of looking at the monthly rent only, they also include the cost of repairs, utilities, and maintenance into their net profit calculations. This is not allowed under IRS rules.

The reason why this is illegal is because it creates an incentive to make expensive upgrades that would otherwise increase the budgeted profits. By including these additional costs, someone could easily keep up with what others consider to be lower incomes.

2. Track Your Expenses Carefully

Just like with number one, investing in equipment and paying extra for better services means spending money. And lots of it!

If possible, track all of your expenses using a free app or software program. This helps ensure no detail gets overlooked.

Own a business

how is passive rental income taxed

As we mentioned before, owning a business is an excellent way to earn passive income. But you must be aware of some important tax rules when it comes to rental properties!

If you own or operate your rental property as a sole proprietor, then you are liable for all taxes due at the property level. This means that you would owe taxes on any capital gains from the property, as well as local real estate taxes, etc.

As a result, many people choose to form their rentals into LLCs (limited liability companies). An LLC will have separate owners who are only responsible for their share of the profits and losses.

The other person’s profit sharing is still taxed, however – they just receive credit for their half in the form of a “passive loss.” So instead of paying active taxes on both halves, they’re paid through the passives alone.

This article will go more in depth about how landlords are taxed with help from a professional. To learn more, visit:

Get a job

how is passive rental income taxed

As of December 1, 2018, there is now no longer a deduction for passive rental income or what some call “passive capital gains”. What this means is that if you are taxed at a state and/or federal level, any active earnings (making money from your services) will not be deducted from your taxable income.

If you earn $5,000 per month as a doctor but only pay yourself $1,500 per month to live on while renting out the other half of your house to make rent every month, your monthly tax bill can go up exponentially!

This change was made due to changes in how we assess passive income and personal income levels. The government wants to know where your money comes from and whether or not you are living within your resources.

With all too frequent reports of wealthy individuals using their wealth to avoid paying taxes, they have taken action.

Diversify your assets

how is passive rental income taxed

As we mentioned before, you can easily earn passive income in the rental sector! Starting with something simple like sharing your apartment or house space with other people, then investing in a residential property, and finally running a business that does not involve owning a store or restaurant – all of these strategies are ways to generate additional income.

The good thing about this type of income is that it is continuous, which makes it much more durable than say, working as an accountant where you only have one client at a time. With rentals, you have many clients coming and going, but your money never disappears.

This article will go into greater detail on some of the tax issues related to renting out your home, car, or boat. Be aware though that depending on how active you are in the rental market, legal precautions need to be taken to ensure you are properly categorized as self-employed.

Create a plan

how is passive rental income taxed

As we mentioned before, you do not have to itemize your exemptions when renting out your residence. You can choose to use the average method or the simple form of income tax here in America. The average method is choosing to report your monthly rental income as an expense instead of revenue in your personal taxes.

By doing this, you are able to deduct half of that amount from your yearly income, effectively lowering your taxable income! This way you pay less money in income tax each year.

The important thing to remember about the average method is that you cannot claim it if you make more than $100,000 per year (or $200,000 for individuals filing jointly).

If you fall into this bracket, then you should consider using the simpler form of taxation where you list only one source of income. By doing so, you will be able to save quite a bit of money in income tax every year.

About The Author

Tiara Ogabang
Tiara Joan Ogabang is a talented content writer and marketing expert, currently working for the innovative company With a passion for writing and a keen eye for detail, Tiara has quickly become an integral part of the team, helping to drive engagement and build brand awareness through her creative and engaging content.
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