How to Pay No Taxes on Rental Income? The Right Strategy

The biggest concern of a landlord is the tax on rental income. Rental Income is an excellent way to build health, buy multiple houses, rent them out, receive monthly paychecks, sounds good right? As good as it may sound, it comes with taxation to the IRS on the rental income you are receiving, but yes there is a but there are some legal tax strategies that can minimize your rental property tax, and if the right strategy is followed in some cases there is NO tax at all!

By understanding rental real estate tax laws and using good tax strategies, you can reduce your taxable rental income and retain more money.

Here, we’ll take you through all the steps to reduce or eliminate tax on rental income and how to defer capital gains taxes when selling a property.

Is Rental Income Taxable?

Short answer: yes, rental income is taxable, and it’s taxed in the exact year you have received it. However, using the right strategies, you can reduce your rental income tax.

How to Reduce or Eliminate Taxes on Rental Income

If you are a landlord looking for techniques to lower your rental income tax, you should follow these strategies to take the most tax advantages possible.

1. Deducting Rental Property Expenses

One of the most used and best way to lower your taxable rental income is by deducting rental property expenses. The IRS allows house owners to deduct various costs with maintaining their properties.

• Property taxes
• House interest
• Mortgage interest
• Maintenance
• Insurance
• Legal and other fees

2. Depreciation: A Powerful Tax Deduction

This is one of the biggest advantages of taxation for landlords. The IRS has allowed you to deduct the value of your property from time to time.

Residential rental properties, the IRS sets a schedule of 27.5 years for depreciation, that is you can deduct a portion of the property’s every year.

• Example:
  If your rental property is worth $275,000, you can deduct $10,000 per year in depreciation. This significantly lowers your taxable income without reducing your actual cash flow.

3. Using the Pass-Through Deduction for Rental Income

Because of the Tax Cuts and Jobs Act (TCJA), landlords who qualify as real estate professionals or own rental property investments through a pass-through entity (LLC or partnership) can deduct up to 20% of their rental income.

So if your rental income is $50,000, you could easily deduct $10,000, lowering your overall tax burden. 

4. Claiming Travel Expenses

If you usually travel a lot to manage your rental properties or handle your properties incomes, you may be able to deduct travel costs

• For the properties you have out of the country/state, you can deduce your airfare.
• If you are driving to pay your rent, you can deduce your mileage
• While driving or flying you can deduce your meals and fun activities costs.

These deductions can help minimize your rental property taxes and reduce income tax.

Reporting Rental Income on Your Tax Return

 As a landlord, you must report rental income on your tax return and expenses on your tax return and this all will be done utilizing Schedule E (Form 1040)

How to report Rental Income and Expenses? 

• In the year you are receiving your rent from your properties, report rental income to the IRS.
• As mentioned above, try to deduct all rental property expenses.
• Compute depreciation assets so you can lower your taxable rental income more.
• Most importantly, a wise choice that most landlords use is to hire a tax professional to help with all this stuff and can face the IRS for you.

By following this and reporting your income and expenses, you can legally reduce your income tax on your rental properties.