Employees with side rental properties can earn additional income, yet they must handle new tax obligations. 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 receive a steady salary and own a rental property, the IRS treats the rental income as passive income. Even if you’re not a full‑time landlord, the same rules for all renters apply to you. Understanding these rules early can help you avoid surprises when you file your return.

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. Additional Income – If you charge for parking, laundry, or other services, those amounts are also taxable.
   
   
3. Reporting – Schedule E (Supplemental Income and Loss) is where you report rental income and expenses, 節税対策 無料相談 then attach it to Form 1040.
   
   

DEDUCTIBLE EXPENSES

You may deduct ordinary and necessary expenses from your gross rental income. Commonly deductible items include:

• Mortgage interest and property taxes
  
• Rental property insurance premiums
  
• Repair costs, excluding improvements
  
• Utility expenses paid on behalf of 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 uses the Modified Accelerated Cost Recovery System (MACRS). The recovery period for residential property is 27.5 years. You can use the IRS depreciation tables or a spreadsheet to keep track.

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. In most cases, residential rentals are treated as passive, so the 15.3% self‑employment tax does not apply. If you are actively managing the rental—frequent repairs, showing the property, or providing significant services—IRS may view 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. If your AGI goes over $100,000, the deduction starts to phase out. Salaried workers should track their AGI closely to see if they qualify for this benefit.

STATE AND LOCAL TAXES

Most states tax rental income similarly to federal rules, though some impose extra 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
  
  

Verify with your state tax authority to find filing deadlines and required forms.

RECORD KEEPING BEST PRACTICES

• Maintain a dedicated bank account for rental income and expenses
  
• Store receipts, invoices, and statements electronically
  
• Maintain a mileage log if you drive to the property for repairs or tenant meetings
  
• Maintain a calendar of major repairs and improvements to aid depreciation calculations
  
  

FILING TIPS

1. E‑file – Electronic filing is standard and accelerates processing and cuts errors.
   
   
2. Schedule E – Double‑check that your income and expenses balance.
   
   
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 split 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 – Retaining a security deposit that isn’t returned is treated as income.
  
  
• Failure to File Schedule E – Omitting this form may trigger penalties and IRS scrutiny.
  
  

CONCLUSION

Side rentals can enhance a salaried worker’s income, though they involve tax obligations that differ from your regular paycheck. Accurate reporting, legitimate deductions, and organization help keep 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.