The US treasury building, where residential rental property tax law is discussed at times.

Understanding Residential Property Tax for Rental Properties

Beyond avoiding common accounting mistakes, landlords should know the facts when it comes to reporting their rental income to keep their property management business in the green – and who better to share such insights than our friends at the Internal Revenue Service (IRS)?

In this article, we’ll define the phrase “residential rental property” from the IRS’s point of view, outline different types of rental income, and explain when you have to report what types of income to keep your property management business running smoothly.

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What is Residential Rental Property?

According to the IRS, residential rental property can include a single-family property, multifamily building (such as an apartment complex), condominium, mobile home, or vacation home. Rental units are also known as “dwellings,” and taxpaying renters can use more than one dwelling as a residence during the year. 

The difference between a primary residence and residential rental property is how it’s used. The IRS notes that “a dwelling is considered a [primary] residence if it’s used for personal purposes during the tax year for more than the greater of 14 days or 10% of the total days rented to others at a fair rental value. In general, personal use includes use of the property by:

  • Any person who owns an interest in the property
  • A family member of any person who owns an interest in the property (unless it’s the family member’s principal residence and the owner receives fair rental value)
  • Anyone who has an arrangement that lets the owner use some other dwelling 
  • Anyone using the property at less than fair rental value”

In other words, your rental unit will not be considered your primary residence as long as it isn’t used for personal purposes, as defined above, for more than 14 days or 10% of the total days you rent the unit to others at a fair market price. 

If you’re concerned because you spend a significant amount of time performing maintenance tasks in your unit, don’t worry! The IRS notes that “personal use doesn’t include days of repair and maintenance if the taxpayer is doing the repairs and maintenance on a largely full-time basis.”

Pro Tip:

If you have to live in your rental for more than 14 days, it isn’t the end of the world, but you’ll need to divide your expenses between rental use and personal use as defined by the guidelines above. When in doubt, seek a local tax professional to help get your ducks in a row!

Types of Rental Income

Now that we have a shared understanding of the phrase “residential rental property,” let’s get into the fun stuff: rental property income. The IRS notes that there are four types of rental income, which include:

  • Normal rent payments: These are the monthly payments your tenant pays in accordance with the terms of your lease agreement.
  • Advance rent payments: Any rent payments you receive before the period that the charge covers are considered advance rent. Suppose you apply the security deposit paid at move-in to the last month’s rent. In that case, it will be considered advance rent – but if you plan to return any part of the security deposit, only include the money you keep to take care of damages upon move out in your taxes.
  • Payments for canceling a lease: If there are specific fees attached to canceling your lease, this money will be considered rental income.
  • Expenses paid by the tenant: Any of your expenses that are paid by the tenant are rental income. For example, if your tenant pays the sewage and trash bills, you would include that amount as rental income.
If you have questions about rental income, check out this video below from The Tax Geek on YouTube:

Of course, there are unique situations that pop up less frequently, such as trading property or services for rent. In practice, that could look like discounting your tenant’s monthly rent charge for two months if your tenant will paint the property.

The IRS says “property or services received, instead of money, as rent, must be included as the fair market value of the property or services in your rental income.” So, in the above paint example, you would “include in your rental income the amount the tenant would have paid for two months worth of rent.”

When to Report Rental Property Income

Don’t wait until April 18th to pay your taxes if you’re expecting to owe more than $1,000 and your rental property business is structured as a sole proprietor, partnership, or S corporation (of which you’re a shareholder). Instead, you’ll need to pay estimated taxes every quarter to stay in the IRS’s good graces. If you don’t pay enough tax by the due date of each payment period, then “you may be charged a penalty even if you’re due a refund when you file your income tax return at the end of the year.” Paying quarterly also helps keep any owed taxes to a manageable amount, instead of one large bill due on April 15th every year.

Estimated taxes are due every year on January 15th, April 15th, June 15th, and September 15th. 

To calculate your estimated taxes, sum your annual tax liability (including self-employment taxes, income taxes, and any other taxes you might owe), then divide that number by four. With that in mind, you may be wondering when to include various figures, such as the four examples of rental income listed above. Luckily, the TurboTenant team and the IRS are here to help:

  • Normal rent payments: Report the monthly rental income you receive every quarter. 
  • Advance rent payments: You should include advance rent in your rental income the year you receive it, regardless of the period covered, according to the IRS.
  • Payments for canceling a lease: This income should be recorded in the quarter when such a fee is paid.
  • Expenses paid by the tenant: Any expenses paid by the tenant should be accounted for in your quarterly taxes (minus any potential deductions! For more information on popular landlord tax deductions, check out this blog).

Note: Even if you file estimated taxes, you’ll also need to file your usual annual tax return, which should include a Schedule E form.

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How to Pay Your Quarterly Landlord Taxes

The IRS allows taxpayers to pay their quarterly taxes through a variety of manners, including:

  • By mail (just be sure to mail your payment on or before the due date)
  • Via IRS Direct Pay, through which you can make payments up to 8 pm ET on the due date
  • With a credit or debit card, which allows you to make payments up to midnight on the due date
  • Through electronic withdrawals from your bank account

Keeping up with tax rules and regulations can be taxing, but that doesn’t mean your rental property accounting has to be! With TurboTenant’s integration with REI Hub, you can organize your books, pull custom reports, and monitor your rental business’s financial health with a few clicks. Read more about our exciting integration and how you stand to benefit.

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