Salaried workers who take on a side rental property can benefit from extra income, yet they encounter additional tax duties. 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 treats the rental income as passive income. Even though you’re not a full‑time landlord, the same rules that apply to anyone who rents property apply to you. Understanding these rules early can help you avoid surprises when you file your return.

TAXABLE INCOME FROM RENTALS

1. Gross Rental Income – Add together every rent payment you receive during the year. Include any security deposits that are actually returned to tenants.
   
   
2. Additional Income – If you charge for parking, laundry, or other services, those amounts are also 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. Commonly deductible items include:

• Mortgage interest and local 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 (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). 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 you already have a payroll tax withholding schedule, the IRS does not double‑tax you on rental income. However, you must still pay self‑employment tax if your rental activity is considered a trade or business. Usually, residential rentals are 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 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. 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 an additional local tax in certain jurisdictions
  
  

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

RECORD KEEPING BEST PRACTICES

• Use a separate bank account for rental income and expenses
  
• Store receipts, invoices, and bank statements electronically
  
• Track mileage when driving 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 – Most taxpayers file electronically, which speeds up processing and reduces errors.
   
   
2. Schedule E – Verify that 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 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 – Holding a security deposit that is not returned counts as income.
  
  
• Failure to File Schedule E – Not filing this form can lead to penalties and increased 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. Maintain tidy records, watch passive loss limits, and, 節税対策 無料相談 if uncertain, seek professional advice to keep your side rental profitable and compliant.