Taxes on Rental Income
Income received for renting real or personal property is subject to federal income tax. Typically rental income is received in the form of cash. However, property or services that the owner receives for allowing someone to use the property is also taxable to the owner as rental income. This includes the amount a tenant pays, any fee to cancel a lease, landlord expenses that the tenant pays, as well as any part of a security deposit that the owner keeps because of a broken lease. The amount of a security deposit that the owner withholds because of damage to the property can be deducted.
Individual owners typically report rental income during the year in which they receive it (and deduct their rental expenses in the year in which they pay them). The owner of rental property generally uses a Schedule E, to report rental income and related expenses, although income received for services that the landlord performs for a tenant's convenience may need to be reported on Schedule C.
The owner of may be able to deduct expenses related to renting the property. Allowable deductions include depreciation allowances, repair costs (to keep the property in good working condition but not to increase its value), and operating expenses (salaries and fees). As long as the owner is renting the property to make a profit and is not using it as a home, the owner's rental expense deductions may exceed rental income. Uncollected rents are generally not deductible. Deduction limitations can apply if the property also serves as the owner's vacation home or if it is rented for less than fair market value.
Net Investment Income Tax on Rental Income
Income from property rented to make a profit may be subject to the Net Investment Income Tax (NIIT) as well as to regular income tax. The NIIT is imposed at a rate of 3.8% on individuals with "net investment income" or, if less, the excess of "modified adjusted gross income" over a fixed threshold amount ($250,000 for a taxpayer who is married filing jointly or a qualifying widow(er) with a dependent child, $125,000 for a taxpayer married filing separately, and $200,000 in all other cases).
"Net investment income" includes most rental income (as well as interest, dividends, annuities, royalties, and other types of income). For purposes of the NIIT, "modified adjusted gross income" is adjusted gross income for regular income tax purposes plus the foreign earned income exclusion. The Form 8960 is used to computes NIIT on an property owner's individual tax return.