Is rental income taxed?

Question

Paul S. · Answer

Unfortunately @Jarred Black the first part of the tax code 26 U.S.C. § 1 imposes the income tax 26 U.S.C. § 61 and § 63 go into further detail. 63 talks about your gross income minus the allowable deductions. 61 defines what income is. Specifically gross income means all income from whatever source derived, including (but not limited to) the following items: (look at 2,3,and 5)

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust

I am not a lawyer (would not admit it if i were) but I did sleep at a Holiday Inn last night. Really I wrote a paper about this for a class on Government a while ago.

Patrick L. · Answer

Before someone gets excited and tries to do this...

"Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 different shareholders (the "100 Shareholder Test"), and 5 or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the "5/50 Test")"

Wayne Brooks · Answer

Income, is income.  yes it should be reported.

Jarred Black · Answer

Thanks for the feedback everyone!! Good to get a consensus from BP..

Colleen F. · Answer

@Jarred Black   they don't pay taxes on their income and they advertise it. Hmmm...smart

It is income (after you deduct expenses).  For unreported income there are a lot of ways they can get caught.  Our state has a property tax credit for tenants where they report their address and there are a number of other tenant programs like this.  The only reason more people don't get caught is the bureaucracies don't talk to each other.

Resign yourself to the fact that taxes are going to eat up a piece of your income, look for all the legal ways to deduct your expenses and depreciation and of course Vote so that you can hopefully help get policies in place you support.

Mike H. · Answer

Its not really an option whether you should or should not report the income. You have to. And its going to look real strange to the IRS if they see depreciation on a house being deducted but no rental income coming in. Or if they see mortgage interest being deducted and no rental income coming in.

For a month or two maybe. Or maybe for 6 - if you have to do an eviction in cook county. But eventually, they're going to catch that and bring the hammer down on their noggin with all the penalties.

That being said, I guess if they own the house free and clear and aren't depreciating it or writing anything off on it, they might not have a real easy way to get caught.

But is it really worth going to jail for a few hundred bucks a month? Its a little like asking would you rob a bank if you thought your odds were 95% that you could get away with it?

The answer should always be no.

Chris Masons · Answer

Hey, I never said it was easy.......

Which is why I just invest in them!  :)

regards,

Chris

Chris Masons · Answer

Yes Jon and the rest who answered are correct. You are taxed on your real estate income.

OR...... if you really don't want to pay taxes on your rental income there is a perfectly legal way to do so....... Form a REIT entity and file for REIT status!  :) Not only will you not have to pay taxes you will have to pass  90% of your earnings to all your shareholders!! :)

regards,

Chris

Patrick L. · Answer

Yes, and some people work jobs and get paid under the table and don't report that either....but it doesn't make it legal.  It's America, if you have income you will be taxed on it (unless you're a giant corporation that can control the tax laws).

Is rental income taxed?

Most Popular Reply