Rental Property Tax Guide

Calculating your income tax and maximizing your deductions for rental properties can be a complex task. Our rental property income tax calculator is the most advanced estimator of your deduction. Whether you need to estimate your rental income, allowable deductions, depreciation, or overall tax liability, this calculator simplifies the process for both short term rentals or long term rentals. The FAQ covers common questions about understanding the various calculations, and interpreting the results.

For more on maximizing your deduction on Short Term Rentals, check out our tax guide- https://www.bnbcalc.com/blog/airbnb-tax-bonus-depreciation-real-estate.

How Do I Use the Rental Property Calculator?

We've made our Rental Property and Income Tax Calculator tool very user-friendly. Follow these steps to get the most accurate results:

1. Type in your address and select it from the results.
2. Double-check that the auto-filled purchase price, number of bedrooms, bathrooms, and max guests are accurate.
3. If the mortgage is fully paid off, turn the "Is it Paid Off?" button on. Otherwise, enter the down payment percentage, Interest rate, and remaining years on your loan.
4. Alternatively, you can also paste a Zillow link of the property if it's available.

How Is Rental Income Taxed?

Rental income is generally taxed as ordinary income at the same rates as other forms of income like wages or self-employment income. The tax rate depends on your total taxable income and filing status for the year.

For 2024, the federal income tax rates range from 10% to 37%, divided into seven tax brackets based on taxable income levels. For example, if you are a single filer with $50,000 in taxable rental income, you would fall into the 22% tax bracket.

To calculate your rental income tax, you must first determine your gross rental income, which includes:

• Advance rent payments
• Regular rent payments
• Security deposits you retain
• Lease cancellation fees
• Property or services received instead of rent payments
• Expenses paid by tenant that reduce their rent

You can then deduct qualified rental expenses from the gross rental income to arrive at your taxable rental income. Allowable deductions include:

• Mortgage interest
• Property taxes
• Operating expenses (utilities, repairs, insurance, etc.)
• Depreciation (differs between STR and LTR’s)
• Property management fees

The net taxable rental income is then added (or subtracted) to your other sources of income and taxed at the applicable rates for your filing status and total taxable income level.

It's important to properly document income and expenses and file Schedule E along with your Form 1040 to report rental activities. Rental income may also be subject to state income taxes.

For foreign owners of U.S. rental properties, nonresident aliens are taxed at 30% on rental income from U.S. sources after allowable deductions.

In summary, while rental income is treated as ordinary income for tax purposes, landlords can reduce their tax burden by deducting qualified rental expenses and taking advantage of depreciation deductions on the property itself. This is why it’s important to keep track of depreciable items and all expenses.

What Tax Deductions Typically Apply to Short-Term Rentals?

To give you a better idea of how to calculate your rental property income tax, here are some of the key tax deductions that typically apply to short-term rental properties:

Rental Expenses

As a short-term rental owner, you can deduct a wide range of expenses related to operating and maintaining the property:

• Operating Expenses: This includes costs like cleaning fees, property management fees, utilities, advertising, marketing, and homeowners association (HOA) dues.
• Repairs and Maintenance: The costs of repairs, maintenance, and routine upkeep of the rental property are deductible expenses. However, improvements that add value or extend the life of the property are treated differently and depreciated over time.
• Mortgage Interest and Property Taxes: You can deduct the mortgage interest and property taxes paid on the rental property each year.
• Platform fees (3%) from Airbnb or VRBO

What Income Tax Deductions Typically Apply to Long-Term Rentals?

While the tax deductions for STRs are similar to LTRs, there are still a couple of key differences. Here are some of the key tax deductions that typically apply to long-term rental properties:

Mortgage Interest

Just like short-term rentals, landlords can deduct the mortgage interest paid on loans used to acquire or improve their long-term rental properties. This is usually one of the largest deductions for rental property owners.

Property Taxes

Property taxes paid on long-term rental properties are fully deductible against rental income each year. This includes any state, local, or municipal real estate taxes.

Operating Expenses

A wide range of operating expenses related to maintaining the rental property are deductible, such as:

• Utilities (electricity, gas, water, etc.) if paid by the landlord
• Insurance premiums (landlord insurance, liability insurance, etc.)
• Homeowners/condo association fees
• Lawn care and landscaping costs
• Pest control
• Snow removal
• Security services

Repairs and Maintenance

The costs of repairing and maintaining the rental property in good operating condition are fully deductible in the year incurred. This includes things like painting, fixing appliances, unclogging plumbing, replacing broken windows, etc.

Property Management Fees

If you hire a property manager to oversee your rental, their management fees are deductible expenses.

Depreciation

Landlords can deduct annual depreciation on their rental properties to account for wear and tear over time. Residential rental properties must be depreciated over 27.5 years using the straight-line method.

Legal and Professional Fees

Any legal fees related to preparing leases or resolving landlord-tenant issues are deductible. The cost of tax preparation services for your rental activity is also deductible.

Rental Losses

If your rental expenses exceed your rental income, you may be able to deduct up to $25,000 of losses against other sources of income like wages or business income, subject to certain income limits. This "passive activity loss" rule does not apply to short-term rentals.

Proper documentation of all income and expenses is crucial for claiming applicable deductions on your tax return. Consulting a tax professional can also ensure you maximize your deductions while remaining compliant with tax laws.

How to calculate depreciation for short term rentals and long term rentals?

Calculating Long Term Rental Depreciation

One of the biggest tax advantages for short-term rentals is the ability to deduct depreciation on the property itself. The IRS allows you to deduct a portion of the property's cost over its useful life, which is typically 27.5 years for residential real estate.

So if your Depreciable Basis (building and its components including renovations but excluding land value) are worth $500,000, here’s your depreciation calculation:

Depreciable Basis: $500,000 
Depreciation Period: 27.5 years
Annual Depreciation = Depreciable Basis / Depreciation Period = 500,000 / 27.5 ≈ 18,181.82

So, you could depreciate approximately $18,181.82 per year for a residential rental property valued at $500,000.

This non-cash deduction helps offset your rental income and reduce your taxable income significantly, especially in the early years of ownership when the depreciation deductions are higher.

Calculating Short Term Rental Depreciation

To maximize your STR tax benefits, consider conducting a Cost-Segregation study on your property. This study separates your property's structure into different components, enabling you to depreciate them over 5 and 15-year accelerated depreciation schedules.

Without it, you would have to depreciate the entire property structure over a traditional commercial property 39 year schedule, resulting in lower annual depreciation amounts. Usually, 20-40% of a property qualifies for accelerated depreciation.

A Cost-Segregation study typically costs around $1-3,000, but our friends at DIYCostSeg.com offer cost segregation studies starting at $495. Use our code BNBCALC for up to $100 off a report.

Here’s an example. For 2024, let's consider a scenario where you own a short-term rental property valued at $500,000. If 40% of the property's value is eligible for bonus depreciation (determined via a cost-seg study) and you are using 60% bonus depreciation, here is how you can calculate the depreciation:

Assumptions:

• Total Property Value: $500,000
• Percentage Eligible for Bonus Depreciation: 40%
• Bonus Depreciation Rate: 60%
• Depreciation Period for Residential Property: 27.5 years

Step-by-Step Calculation:

Determine the Portion Eligible for Bonus Depreciation:

Eligible Value: 500,000 × 0.40 = 200,000

Calculate Bonus Depreciation:

Bonus Depreciation Amount: 200,000 × 0.60 = 120,000

This means you can deduct $120,000 in the first year as bonus depreciation.

Calculate the Remaining Depreciable Basis:

Remaining Basis: 500,000 - 120,000 = 380,000

Straight-Line (Standard) Depreciation for the Remaining Basis:

Annual Depreciation: 380,000 / 27.5 ≈ 13,818.18

First-Year Depreciation Summary:

• Bonus Depreciation: $120,000
• Straight-Line (Standard) Depreciation: $13,818.18
• Total First-Year Depreciation: $120,000 + $13,818.18 = $133,818.18

Qualified Business Income Deduction

Eligible short-term rental owners may qualify for the 20% Qualified Business Income (QBI) deduction under certain conditions. This allows you to deduct 20% of your net rental income from your taxable income.

Other Potential Deductions

Depending on your specific situation, you may be able to claim additional deductions such as:

• Vehicle expenses for property management/maintenance
• Home office deduction if you use a portion for business
• Legal/professional fees related to the rental
• Travel expenses to manage/maintain the property
• Insurance premiums

Proper documentation of all income and expenses is crucial to maximize your allowable deductions. It's also advisable to consult a tax professional to ensure you are taking advantage of all applicable deductions while remaining compliant with tax laws.