Author Topic: How much to set aside from rental income for taxes?  (Read 7239 times)

MsPeacock

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How much to set aside from rental income for taxes?
« on: March 13, 2016, 02:40:38 PM »
I am renting out a room in my house starting next month. I'll be setting up a separate account to collect rent and manage security deposit and such. I did reading on calculating costs/deductions for various things like utilities and repairs. I just wondered if there was a ballpark figure for taxes on rental income after deductions. E.g. 25%? Is it taxed at the same rate as my job income?


randymarsh

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Re: How much to set aside from rental income for taxes?
« Reply #1 on: March 13, 2016, 07:55:06 PM »
It's treated a regular (business) income, but you don't have to pay self-employment tax. I'd save the amount I usually see recommended for freelancers - about 30%.

MsPeacock

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Re: How much to set aside from rental income for taxes?
« Reply #2 on: March 13, 2016, 08:02:21 PM »
Thank you!

zephyr911

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Re: How much to set aside from rental income for taxes?
« Reply #3 on: March 15, 2016, 06:16:06 AM »
Unless you're collecting an exorbitant amount of rent for that part of your house, it's unlikely to substantially increase your taxable income.

Renting out part of your own home turns a portion of various personal expenses into tax-deductible rental expenses. You need to determine the percentage of the home that's used for the rental and make a comprehensive list of those costs. Insurance, utilities, cleaning, and maintenance are a good start, and be sure to include supplies (light bulbs and other little things add up). Also, be sure to claim depreciation on the rental portion of the home - if the structure is worth $200K and you rent out half of it, that's a $3636 annual deduction on a 27.5-year MACRS straight-line schedule (the most common method).

When I rented out a room in my last home, I ended up with a loss for tax purposes, even after collecting about $7k/yr.

However, to answer your final question, if you do end up showing a profit after all that, yes, it is taxed as ordinary income.

http://www.nolo.com/legal-encyclopedia/tax-issues-when-renting-out-room-your-house.html

PadAdventure

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Re: How much to set aside from rental income for taxes?
« Reply #4 on: March 15, 2016, 07:38:52 AM »
20-30% if youíre particularly worried about it, or have higher end rentals.  I have six, all lower end, and with all the deductions and depreciation, itís likely you wonít pay anything on them.  Thatís the beauty of rental real estate.  Just keep good records.

Donít forget, you get straight line depreciation, What house is worth divided by 27.5, every year.  You also depreciate everything in it, and subtract all costs and expenses.  The only way you should be in the positives is if youíre trying to create provable income for via your taxes for whatever reason.

oh, zephyr just beat me to it, and much more eloquently.
« Last Edit: March 15, 2016, 08:16:19 AM by PadAdventure »

TheOldestYoungMan

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Re: How much to set aside from rental income for taxes?
« Reply #5 on: March 17, 2016, 03:44:02 PM »
Yea what they said.  Renting out one room has resulted in an overall reduction in tax liability for me.  You can estimate it for free on turbotax right now (just keep declining to pay) and fill out all your current bills.

It makes so many things deductible.

Prior to renting, can't deduct your electric bill.  Renting you can deduct 1/4 or 1/3 (however much you estimate your rental sq. ft. at).

It's awesome.

I think (not 100% positive) that depreciating the house as part of that decreases your basis in the house, so if you ever sell the home as a taxable event you'd have a higher tax bill at that point, but for your own home you are unlikely to actually do this (I think).

MsPeacock

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Re: How much to set aside from rental income for taxes?
« Reply #6 on: March 17, 2016, 04:51:09 PM »
Thank you everyone for all the replies. I have a tenant set up for Aug - Dec and am hoping to find somenone short-term for the summer.

Since the rental is furnished and includes a kitchenette - which I had to purchase things for - I am assuming I can deduct things like the pots, microwave, plates, etc. on my taxes.

Noted on the utilities. 

clarkfan1979

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Re: How much to set aside from rental income for taxes?
« Reply #7 on: March 18, 2016, 02:05:00 AM »
When I first started it was zero. Because I depreciated my house and had a lot of travel deductions my house was a loss for the first few years and lowered my tax bill.

PadAdventure

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Re: How much to set aside from rental income for taxes?
« Reply #8 on: March 18, 2016, 07:54:59 AM »
Thank you everyone for all the replies. I have a tenant set up for Aug - Dec and am hoping to find somenone short-term for the summer.

Since the rental is furnished and includes a kitchenette - which I had to purchase things for - I am assuming I can deduct things like the pots, microwave, plates, etc. on my taxes.

Noted on the utilities.

I believe mostly appliances can be deducted, but they have to be new, and have a time schedule for depreciation, for example a new refrigerator may be deductible, divided over five years, or whatever the IRS schedule puts each item at.

It's more for items that will depreciate, and repairs.  Remodel/Renovations, upgrades are not typically deductible from what I understand.
« Last Edit: March 18, 2016, 07:58:25 AM by PadAdventure »

TheOldestYoungMan

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Re: How much to set aside from rental income for taxes?
« Reply #9 on: March 18, 2016, 09:49:38 AM »
You keep records of upgrades because, as I understand it, expenses associated with the rental fall into one of three categories:

1.  deductible from income directly
2.  deductible from income over time (depreciation)
3.  used to increase your basis in the property (offsetting the effect of depreciation).

So if you depreciate 100k out of your 250k house over a decade or so, but you do 100k worth of work on the house, when you sell it for 300k you only have 50k of capital gain instead of 150k.

Of course, I don't actually know what I'm talking about, so consult a tax professional.

Oh, and it isn't just utilities.  If you rent 50% of your house, you can deduct 50% of:

yard maintenance
netflix
cable
electricity
water
sewer
trash
maid service/cleaning supplies
consumables (toilet paper, shower curtains, laundry detergent, anything you provide)
advertising for vacancy

And these are deductible 100% of the time, even if the unit is vacant, as long as you are trying to rent it, starting from the first day of tenancy until you give up trying to rent it out.

There's a list of allowed and not allowed items from the IRS, but if it isn't specifically disallowed I deduct it, because America!

I think there's also a cautionary tale about claiming a loss on a business year after year.  At some point the IRS is going to come back at you for intentionally incurring a loss, so the goal is to charge enough in rent to keep it rented out, and earning enough to throw the IRS a twenty every other year.