If you’re considering getting into rental properties, you need to educate yourself on all of the laws and rules that are involved, especially about taxes. The income that you make on any rental properties you own is considered taxable income. When it comes time to sell that rental property, you’ll pay capital gains taxes on your net profit from the sale. These tax obligations can quickly turn your profitable venture into a loss, so it’s very important to know how they work before you purchase a rental property.
Let’s look more into these different taxes and how they may affect you as a landlord:
Tax on Rental Income
The IRS views the money you make renting out your properties as taxable income. Just like most other forms of income (other than a regular job that issues you a W-2 each year), the IRS also allows you to deduct some costs and expenses from that rental income to offset your tax burden.
If you are an individual renting out properties, your rental income will be taxed the same way as income from a regular job. In 2022, individual income tax rates range from 0% up to 37%, depending on your taxable income. Individual landlords should report their rental income on IRS Form 1040 Schedule E – Supplemental Income and Loss.
If you rent out properties under a business name, such as a partnership or LLC, then your rental property income will be subject to self-employment tax. In 2022, the self-employment tax rate is 15.3%. Sole proprietors and partnerships that qualify as “Qualified Joint Ventures” should report their rental income on IRS Form 1040 Schedule C – Profit of Loss from Business and file IRS Form 1040 Schedule SE – Self-Employment Tax as well. Partnerships, LLCs, and corporations should file their rental income on IRS Form 1065 or IRS Form 1120, as required.
Capital Gains Tax on the Sale of Rental Property
Not only is the income you make from renting out your properties taxed, but when you decide to sell those properties, you’ll also pay tax on the profit from the sale. The rate at which the profits are taxed depends on how long you have owned the property. In general, the longer you own the property and the lower your taxable income for the year, the fewer capital gains tax you will pay.
You are also allowed to deduct certain expenses from the sale price of the rental property, as well as add in some expenses that you incurred during the purchase of the property when determining the total profit on the sale. Take advantage of all of these deductions when calculating your capital gains to lower the taxes you’ll owe.
For high-income investors, an additional 3.8% net investment income tax may also apply. Consult with a tax expert for more information on exactly what taxes you will owe on the sale of rental properties.
Rental Property Investors Wanted in Tampa
If you’re considering getting into the rental property market on the Gulf coast, call Benefit Title Services at (813) 251-1420 or visit us online to see how we can help you streamline the process and maximize your investment’s value today!