Salaried workers who take on a side rental property can benefit from extra income, but they also face a new set of tax responsibilities. The following guide breaks down what you need to know to stay compliant, minimize liability, and make the most of available deductions.

INTRODUCTION

If you earn a regular paycheck and also own a rental property, the IRS views the rental income as passive. Even though you’re not a full‑time landlord, the same rules that apply to anyone who rents property apply to you. Familiarizing yourself with these rules early can stop unexpected tax issues when filing.

TAXABLE INCOME FROM RENTALS

1. Total Rental Income – Sum all rent payments received during the year. Add any security deposits that are refunded to tenants.
   
   
2. Supplemental Income – Fees for parking, laundry, or other services are taxable.
   
   
3. Reporting – Schedule E (Supplemental Income and Loss) is where you report rental income and expenses, then attach it to Form 1040.
   
   

DEDUCTIBLE EXPENSES

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

• Mortgage interest and local property taxes
  
• Rental property insurance premiums
  
• Repair costs, excluding improvements
  
• Utilities you pay on behalf of tenants
  
• Professional services—accounting, legal, property management
  
• Depreciation of the building but 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 calculated using the Modified Accelerated Cost Recovery System (MACRS). The recovery period for residential property is 27.5 years. You can refer to IRS depreciation tables or a spreadsheet to track it.

SPECIAL RULES FOR SALARIED WORKERS

Since you have payroll tax withholding, the IRS won’t double‑tax your rental income. Still, you must pay self‑employment tax if your rental activity qualifies as a trade or business. Typically, residential rentals are passive, so the 15.3% self‑employment tax is not applied. If you actively manage the rental—frequent repairs, showing the property, or offering major services—the IRS may treat it as a business, triggering self‑employment tax.

CONSOLIDATED DEDUCTIONS

If your rental loss is below $25,000 and you file a joint return, you might offset up to $25,000 of ordinary income, given 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: Requires a real property tax return (Form 593) if you own a rental in the state
  
• New York: Requires a separate filing for rental income and may impose additional local taxes in some jurisdictions
  
  

Check your state tax authority for specific filing deadlines and forms.

RECORD KEEPING BEST PRACTICES

• Keep a separate bank account for rental income and expenses
  
• Store receipts, 法人 税金対策 問い合わせ invoices, and statements electronically
  
• Keep a mileage log when driving to the property for repairs or tenant meetings
  
• Keep a calendar of major repairs and improvements; this helps with depreciation calculations
  
  

FILING TIPS

1. E‑file – Most taxpayers file electronically, which speeds up processing and reduces errors.
   
   
2. Schedule E – Ensure your income and expenses are balanced.
   
   
3. Tax Software – Many programs feature a "Rental Property" module that automates 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 apportioned if they serve both personal and rental purposes.
  
  
• Improvement vs. Repair – A new bathroom addition is an improvement and should be depreciated, not deducted immediately.
  
  
• Unreported Security Deposits – If you keep a security deposit that is not returned, it is considered income.
  
  
• Failure to File Schedule E – Missing this form can trigger penalties and additional scrutiny from the IRS.
  
  

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. By accurately reporting rental income, taking advantage of legitimate deductions, and staying organized, you can keep your tax liability low and avoid costly mistakes. Maintain tidy records, watch passive loss limits, and, if uncertain, seek professional advice to keep your side rental profitable and compliant.