In This Article

  1. What Is The Rental Income Tax Rate?
  2. How To Calculate Rental Income & Tax Rate
  3. Tax Deductions from Rental Income
  4. How to Report Rental Income
  5. Rental Income Tax Rate

Owning a rental property can be a great source of passive income, but just like any other investment, your rental income must be reported on your annual tax return. 

With tax season approaching, this brings about questions for many first-time real estate investors and even seasoned investors: “How is rental income taxed?” or “Will rental income be taxed any differently this year?”

In this article, we will examine the rental income tax rate so that you can be confident that you are:

What Is The Rental Income Tax Rate?

You’re probably asking yourself as you fill out your taxes, what is the rental income tax rate? 

To put it simply, rental income is taxed the same as ordinary income. 

How To Calculate Rental Income & Tax Rate

It’s important to keep track of all income and expenses incurred at the property throughout the year in order to calculate your rental income tax rate.

Because rental income is considered by the IRS as any payment you receive from anyone who uses or occupies a property, you must report all rental income received for a property. 

When you add these items up, you might be surprised to see this pushed you up a few tax brackets. Don’t stress! In the next section, we will cover deductions that can reduce your rental income tax rate and save you money.

Tax Deductions from Rental Income

When calculating deductions, one major deduction you can take is the cost of depreciation  for the property. The easiest and most common way of depreciating a property is called Straight-Line Depreciation

When using this method, you must first know the cost basis, which is generally your acquisition cost of the property plus any expenses, including any money you borrowed to buy the property. 

The cost basis is then spread over the tax life of your property, generally defined as 27.5 years. 

If this is your first year owning the property, this deduction will be prorated over the number of months with the first month only being counted as half. 

Here is a rental income tax rate example:

You bought a property in September of last year for $250,000. 

The cost basis calculated would be $250,000 divided by 27.5 years equaling out to a deprecating expense of $9,090 per year. 

For your taxes this year, you would take $9,090 and multiply it by .29 (3.5 months/12 months) giving you a depreciation expense of $2,651 for the first year. 

Any other costs related to the property can be deducted, including:

  • maintaining the property 
  • repairs
  • any interest paid on the property's mortgage 
  • advertising costs 
  • HOA or condo fees
  • local property taxes

When taking any deductions to reduce your rental income tax rate be sure all expenses are ordinary and necessary

How to Report Rental Income

After taking all necessary deductions from your rental income and you have calculated your rental income tax rate you must report all income and deductions on Schedule E

Depreciation calculated on a rental property must be reported on IRS Form 4562. 

The total income calculated from your rental property listed on your Schedule E form then carries onto your Form 1040.

Rental Income Tax Rate

As a real estate investor, the key for paying rental income tax is knowing how your rental income tax rate is calculated, and knowing the deductions you can take to avoid overpaying and save money on your taxes each year.