I've got a handful of SFHs in a small midwest city. Got into the business quite by accident several years ago when I started renting my former residence after it didn't sell right away. Wound up selling that one, but later started buying others with the intent of renting them. In the last few years I've gotten into the business quickly. My only regret (so far) is that I didn't start doing this at 20 instead of 30.
This past year I met with a tax accountant to do some tax planning (for the first time since I've been in the rental business). He told me that (legally) I should be paying tax on the rental income to both the city and county in which I live. He also reminded me that our city taxes gross income at 2%, while federal and state taxes are levied on net income. As a tax preparer doing business in the city, in addition to doing taxes for businesses/individuals in the city, he self-reports his own income to the city and helps clients report theirs.
I think most investors in this forum know that rental income has some advantages over earned income which include a) not being subject to social security and medicare tax and b) deferral of tax by claiming depreciation (at least for federal and *my state).
But, I have to admit, I got into this business without calculating how it would affect my local tax liability. And if my accountant is right, the impact could be consequential(though not major), and it would certainly not deter further investment of this type. For example, if rental income gross was $40,000, that would be $800 just to the city, which is the same amount paid by someone with a $40,000 salary. Of course the amount of taxable income for state and federal taxes would be lowered by deductible expenses and depreciation.
For the record, I think my accountant is wrong and I'm having him and others check into it to clear things up. Without getting into too much detail, I *think* that my city tax applies only to "earned" gross income.
But, I am curious what other real estate investors on this forum have to say about how their local(city, county) tax liability is affected by their rental income.