Rental income includes any payment you receive for the use or occupation of property, such as rent, advance rent, and lease cancellation fees. You must report this income on your tax return for all properties you own ( IRS Pub. 538, “Accounting Periods and Methods”). For detailed guidance, check out the Tips on Rental Real Estate Income, Deductions and Recordkeeping and the Real Estate Tax Center on the IRS website.
leased for more than 30 days. Income from long-term rentals is typically considered passive income. Subject to ordinary income tax rates. You can deduct mortgage interest, property taxes, operating expenses, depreciation, and repairs.
leased for 30 days or less. Income from short-term rentals can be considered active income, especially if you provide substantial services (e.g., cleaning, concierge). Also subject to ordinary income tax rates but may be subject to self-employment tax if deemed active. Deductions are similar to long-term rentals, but you must prorate expenses if you use the property personally.
Holding property in a Limited Liability Company (LLC) can provide liability protection and potential tax benefits. LLCs can help segregate income and expenses, making it easier to manage and potentially reducing self-employment taxes. Income flows through to your personal tax return, but you can deduct business expenses directly related to the LLC.
allows you to deduct the cost of the property over its useful life (27.5 years for residential, 39 years for commercial). Reduces taxable income significantly. Example: if you purchase a rental property for $275,000, you can deduct $10,000 annually ($275,000/27.5). See IRS Pub. 527, “Residential Rental Property” for more details.
Accelerates depreciation by segregating personal property from real property. Increases depreciation deductions in the early years. Example: identify components like fixtures and fittings that can be depreciated over 5, 7, or 15 years instead of 27.5 or 39 years.