Real Estate Income & Taxes

[Arthur Voskanyan]

How is rental income taxed? For example if I have multiple investment cash flow properties and when tax season comes. Is the total income whether vacation rentals/ long term rent, taxed as regular income tax based on whatever tax bracket you fall into, or is it taxed as self-employment tax which is taxed generally higher? Thanks guys in advance. Arthur Voskanyan

[Nicholas Aiola]

Originally posted by @Arthur Voskanyan:

How is rental income taxed? For example if I have multiple investment cash flow properties and when tax season comes. Is the total income whether vacation rentals/ long term rent, taxed as regular income tax based on whatever tax bracket you fall into, or is it taxed as self-employment tax which is taxed generally higher? Thanks guys in advance.

Arthur Voskanyan

 Hi, Arthur!

Assuming you operate your rentals as an individual or through a pass-through entity (sole proprietorship, LLC, partnership, S Corp), rental income is taxed at your ordinary rates (based on your tax bracket). Self-employment tax, which is a tax in addition to ordinary income tax, does not apply to rental income.

There are special rules for vacation rentals, however...

If it is your vacation home and you use it personally, the IRS allows you to rent it out for up to 14 days, tax-free!

If it is a vacation home that is primarily rented out and used personally on occasion, your deductions may be limited. If you use your vacation home personally for more than 14 days or more than 10% of the total rental days for the year (whichever is greater), some of your rental expense deductions could be limited. 

See two examples below:

1. If you rent out a vacation home for 100 days out of the year, you will be allowed to use the vacation home for up to 14 days of personal use and still deduct 100% of allowed rental expenses. In this case, 14 days > 10% of total rental days (100 x 10% = 10).

2. If you rent out a vacation home for 200 days out of the year, you will be allowed to use the vacation home for up to 20 days of personal use and still deduct 100% of allowed rental expenses. In this case, 10% of total rental days (200 x 10% = 20) > 14 days.

Hope this helps!

Nick Aiola, CPA