Employees with side rental properties can gain supplemental earnings, yet they must handle new tax obligations. Here’s what you should know to stay compliant, limit liability, and fully utilize deductions.

INTRODUCTION

If you get a regular paycheck and own a rental home, 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. Familiarizing yourself with these rules early can stop unexpected tax issues when filing.

TAXABLE INCOME FROM RENTALS

1. Gross Rental Income – Add together every rent payment you receive during the year. Also add security deposits that are returned to tenants.
   
   
2. Additional Income – If you charge for parking, laundry, or other services, those amounts are also taxable.
   
   
3. Reporting – You report rental income and expenses on Schedule E, which attaches to your Form 1040.
   
   

DEDUCTIBLE EXPENSES

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

• Mortgage interest and property taxes
  
• Rental property insurance premiums
  
• Repairs (but not improvements)
  
• Utilities paid by you for tenants
  
• Professional services—accounting, legal, property management
  
• Depreciation of the building, excluding the land
  
• Advertising, moving expenses, and office supplies used for rental operations
  
  

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). Residential properties recover over 27.5 years. You can use the IRS depreciation tables or a spreadsheet to keep track.

SPECIAL RULES FOR SALARIED WORKERS

Because you already have a payroll tax withholding schedule, the IRS does not double‑tax you on 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. 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

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

• California: Requires filing a real property tax return (Form 593) if you own a rental property in California
  
• New York: Requires a separate filing for rental income, and may impose an additional local tax in certain jurisdictions
  
  

Consult your state tax agency for specific deadlines and 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
  
• 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 – Verify that income and expenses balance.
   
   
3. Tax Software – Many programs feature a "Rental Property" module that automates depreciation and 確定申告 節税方法 問い合わせ expense tracking.
   
   
4. Professional Advice – If your rental income is large or you’re unsure about passive loss limits, seek a CPA specializing in real estate taxation.
   
   

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 – Missing this form can trigger penalties and additional scrutiny from the IRS.
  
  

CONCLUSION

Side rentals may boost a salaried worker’s income, yet they carry tax duties distinct from your regular paycheck. Accurate reporting, legitimate deductions, and organization help keep tax liability low and avoid costly mistakes. Keep records tidy, monitor passive loss limits, and, when unsure, consult professionals to keep your side rental profitable and compliant.