Employees with side rental properties can gain supplemental earnings, yet they encounter additional tax duties. This guide explains what you must know to remain compliant, reduce liability, and maximize deductions.

INTRODUCTION

If you receive a steady salary and own a rental property, the IRS considers the rental income passive. Even if you’re not a full‑time landlord, the same rules for all renters apply to you. Knowing these rules in advance can prevent surprises on your return.

TAXABLE INCOME FROM RENTALS

1. Total Rental Income – Sum all rent payments received during the year. Also add security deposits that are returned to tenants.
   
   
2. Extra Income – Charges for parking, laundry, or other services are taxable.
   
   
3. Reporting – Rental income and expenses are reported on Schedule E (Supplemental Income and Loss). The form is attached to your Form 1040.
   
   

DEDUCTIBLE EXPENSES

You can subtract ordinary and necessary expenses from your gross rental income. Typical deductions include:

• Mortgage interest and property taxes
  
• Insurance premiums for the rental property
  
• Repairs but not improvements
  
• Utilities paid by you for tenants
  
• Professional services—accounting, legal, property management
  
• Depreciation of the building (not the land)
  
• Advertising to attract tenants, moving costs, and office supplies for rental work
  
  

Depreciation is calculated using the Modified Accelerated Cost Recovery System (MACRS). For residential property, the recovery period is 27.5 years. You can use the IRS depreciation tables or a spreadsheet to keep track.

Depreciation is computed via the Modified Accelerated Cost Recovery System (MACRS). For residential property, the recovery period is 27.5 years. You can use the IRS depreciation tables or a spreadsheet to keep track.

SPECIAL RULES FOR SALARIED WORKERS

Because payroll tax withholding is already in place, the IRS won’t double‑tax your rental income. Yet, you must pay self‑employment tax if your rental activity is deemed a trade or business. Usually, residential rentals are passive, so the 15.3% self‑employment tax does not apply. Should you actively manage the rental—performing frequent repairs, showing the property, or offering significant services—the IRS may consider it a business, thereby triggering self‑employment tax.

CONSOLIDATED DEDUCTIONS

If your rental loss is under $25,000 and you file a joint return, you may be able to offset up to $25,000 of ordinary income, provided you meet the "active participation" test. Once your adjusted gross income exceeds $100,000, the deduction phases out. Salaried employees should monitor their AGI closely to determine if they qualify for this benefit.

STATE AND LOCAL TAXES

Many states tax rental income similarly to federal rules, but some have additional requirements:

• California: Must file a real property tax return (Form 593) when owning a rental in California
  
• New York: Requires a separate filing for rental income and may impose additional local taxes in some jurisdictions
  
  

Verify with your state tax authority to find filing deadlines and 法人 税金対策 問い合わせ required forms.

RECORD KEEPING BEST PRACTICES

• Keep a separate bank account for rental income and expenses
  
• Store receipts, invoices, and bank statements electronically
  
• Keep a mileage log when driving to the property for repairs or tenant meetings
  
• Keep a calendar of major repairs and improvements to facilitate depreciation calculations
  
  

FILING TIPS

1. E‑file – Filing electronically is common and speeds processing while reducing errors.
   
   
2. Schedule E – Ensure your income and expenses are balanced.
   
   
3. Tax Software – Most tax software includes a "Rental Property" module for automated depreciation and expense tracking.
   
   
4. Professional Advice – For significant rental income or uncertainty about passive loss limits, consult a CPA who specializes in real estate taxes.
   
   

COMMON PITFALLS

• Mixing Personal and Rental Expenses – Personal utilities or mortgage payments must be divided if they serve both personal and rental purposes.
  
  
• Improvement vs. Repair – Adding a new bathroom is an improvement, thus depreciated, not deducted in the purchase year.
  
  
• Unreported Security Deposits – If you keep a security deposit that is not returned, it is considered income.
  
  
• Failure to File Schedule E – Omitting this form may trigger penalties and IRS scrutiny.
  
  

CONCLUSION

Side rentals can be a valuable supplement to a salaried worker’s income, but they come with tax responsibilities that differ from your regular paycheck. Reporting rental income accurately, using legitimate deductions, and staying organized keeps tax liability low and prevents costly errors. Keep records tidy, monitor passive loss limits, and, when unsure, consult professionals to keep your side rental profitable and compliant.