Financial Focus: The Path to a Bigger Tax Refund for 2021 – Rental Income/Expense (Part 5 of 7)

By Professor Anthony Rivieccio MBA PFA

Many people own a home or property that they rent out. People do it for many reasons, most notably for additional income, but is this non wage gross income taxable? Yes.

Notice I said gross? Because, like a simple math problem, now that you’ve added up your income, now it’s time to subtract your income from your expenses, because your net income is what you are finally taxed on. Not your gross income.

Figuring out gross income is pretty simple, right? If you own a home or property that you now decide to rent out then you have rental income.

Now, when it comes to expenses, the IRS allows you to deduct any repairs that you make on the rental property. They do not allow you to deduct improvements. An improvement should be depreciated as a separate depreciable property.

A repair keeps your rental property in good condition and is a deductible expense in the year that you pay for it. Examples of Repairs include:

-Painting

-Fixing a broken toilet

-Replacing a faulty light switch

-Mortgage interest

-Property tax

-Operating expenses

-Depreciation

-Water rates

-Taxes

-Gas and electricity

-Landlord insurance costs of services

-The wages of gardeners and cleaners

-Agents’ fees and legal fees

-Accountant’s fees rents

-Ground rents and service charges

-Phone calls

-Stationery

-Advertising for new tenants

Improvements, on the other hand, add value to your property and are not tax-deductible when you pay for them. You must recover the cost of improvements by depreciating the expense over your property’s life expectancy. Improvements can include:

-A new roof, patio, or garage

-You need to decide whether your changes were improvement or repairs

-If they are repairs, you would expense them off

-If they were improvements, you would enter each improvement as a separate depreciable asset

You’re allowed to reduce your rental income by subtracting expenses that you incur to get your property ready to rent, and then to maintain it as a rental. You report rental income and expenses on Schedule E, Supplemental Income and Loss. Schedule E is then filed with your Form 1040.

Here comes the best part: taxable income or loss is rent received minus expenses.

Suppose the property is rented for $10,000 a year, and the total of operating expenses paid by the owner, such as property tax, insurance, and repairs, is $7,500. Then your net rental income is $2,500. This is what you get taxed on!

Net rental income refers to the amount of income received from tenants, minus the expenses incurred on the ownership of rented property. The formula for calculating net rental income is to subtract the costs of tenant vacancy or default, along with all operating expenditures, from the gross potential rental income, just like the above example.

So, from a tax paying standpoint (assuming a federal and state combined bracket of 25 percent), $2,500 x 25 percent or $625 would be your tax bite:

Your tax savings: ($10,000 x 25 percent) $2,500.

Next week: Investments, Capital Gains & Losses

Professor Anthony Rivieccio, MBA PFA, is the founder and CEO of The Financial Advisors Group, celebrating its 25th year as a fee-only financial planning firm specializing in solving one’s financial problems. Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The Bronx News, thisisthebronX.info and The Bronx Chronicle. Mr. Rivieccio also pens a financial article called “Money Talk”. Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University. For financial assistance, Anthony can be reached at (347) 575-5045. Have Facebook? Our professional page is: www.facebook.com/iwantmytaxmoney