Employees with side rental properties can benefit from extra 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 get a regular paycheck and own a rental home, the IRS views the rental income as passive. Although you’re not a full‑time landlord, the same rules that apply to all rental property owners apply to you. Knowing these rules in advance can prevent surprises on your return.

TAXABLE INCOME FROM RENTALS

1. Gross Rental Earnings – Combine all rent received in 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 – You report rental income and expenses on Schedule E, which attaches to your Form 1040.
   
   

DEDUCTIBLE EXPENSES

You may deduct ordinary and necessary expenses from your gross rental income. Common deductions include:

• Mortgage interest plus property taxes
  
• Rental property insurance premiums
  
• Repairs (but not improvements)
  
• Utility expenses paid on behalf of tenants
  
• Professional services—accounting, legal, property management
  
• Depreciation of the building but not the land
  
• Advertising, moving expenses, and 確定申告 節税方法 問い合わせ 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 uses the Modified Accelerated Cost Recovery System (MACRS). The recovery period for residential property is 27.5 years. You can use IRS depreciation tables or a spreadsheet to monitor it.

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

Should your rental loss be less than $25,000 and you file jointly, you could offset up to $25,000 of ordinary income if you satisfy the "active participation" test. If your AGI goes over $100,000, the deduction starts to phase 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 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
  
• Keep receipts, invoices, and bank statements in electronic form
  
• 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 – Filing electronically is common and speeds processing while reducing errors.
   
   
2. Schedule E – Double‑check that your income and expenses balance.
   
   
3. Tax Software – Many programs have a "Rental Property" module that automates depreciation and expense tracking.
   
   
4. Professional Advice – If your rental income is substantial or you’re unsure about the passive activity loss limits, consult a CPA who specializes 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 and should be depreciated, not deducted in the year of purchase.
  
  
• Unreported Security Deposits – Holding a security deposit that is not returned counts as income.
  
  
• Failure to File Schedule E – Omitting this form may trigger penalties and IRS scrutiny.
  
  

CONCLUSION

Side rentals may boost a salaried worker’s income, yet they carry tax duties distinct 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. Keep your records neat, stay aware of passive loss limitations, and, when in doubt, seek professional guidance so your side rental remains a profitable, compliant….