Salaried employees owning a rental side venture can benefit from extra income, yet they encounter additional tax duties. The following guide breaks down what you need to know to stay compliant, minimize liability, and make the most of available deductions.

INTRODUCTION

If you earn a regular paycheck and also own a rental property, the IRS views the rental income as passive. Although you’re not a full‑time landlord, the same rules that apply to all rental property owners apply to you. Familiarizing yourself with these rules early can stop unexpected tax issues when filing.

TAXABLE INCOME FROM RENTALS

1. Total Rental Income – Sum all rent payments received during the year. Include any security deposits that are actually returned to tenants.
   
   
2. Supplemental Income – Fees for parking, laundry, or other services are taxable.
   
   
3. Reporting – Schedule E (Supplemental Income and Loss) is where you report rental income and expenses, then attach it to Form 1040.
   
   

DEDUCTIBLE EXPENSES

You can deduct ordinary and necessary expenses from your gross rental income. Common deductions include:

• Mortgage interest plus property taxes
  
• Insurance premiums covering the rental property
  
• Repairs but not improvements
  
• Utilities paid by you for tenants
  
• Professional services (accounting, legal, property management)
  
• Depreciation of the building, excluding the land
  
• Advertising to attract tenants, moving costs, and office supplies for rental work
  
  

Depreciation is calculated using the Modified Accelerated Cost Recovery System (MACRS). For residential property, the recovery period is 27.5 years. You can use the IRS depreciation tables or a spreadsheet to keep track.

Depreciation is calculated using the Modified Accelerated Cost Recovery System (MACRS). The recovery period for residential property is 27.5 years. You can use IRS depreciation tables or a spreadsheet to monitor it.

SPECIAL RULES FOR SALARIED WORKERS

Because you already have a payroll tax withholding schedule, the IRS does not double‑tax you on rental income. Still, you must pay self‑employment tax if your rental activity qualifies as a trade or business. Typically, residential rentals are passive, so the 15.3% self‑employment tax is not applied. If you are actively managing the rental—frequent repairs, showing the property, or 法人 税金対策 問い合わせ providing significant services—IRS may view it as a business, triggering self‑employment tax.

CONSOLIDATED DEDUCTIONS

Should your rental loss be less than $25,000 and you file jointly, you could offset up to $25,000 of ordinary income if you satisfy the "active participation" test. When your adjusted gross income surpasses $100,000, the deduction gradually phases out. Salaried workers should track their AGI closely to see if they qualify for this benefit.

STATE AND LOCAL TAXES

Many states tax rental income similarly to federal rules, but some have additional requirements:

• California: Requires a real property tax return (Form 593) if you own a rental in the state
  
• New York: Requires a separate filing for rental income, and may impose an additional local tax in certain jurisdictions
  
  

Check your state tax authority for specific filing deadlines and forms.

RECORD KEEPING BEST PRACTICES

• Maintain a dedicated bank account for rental income and expenses
  
• Store receipts, invoices, and statements electronically
  
• Keep a mileage log when driving to the property for repairs or tenant meetings
  
• Maintain a calendar of major repairs and improvements to aid depreciation calculations
  
  

FILING TIPS

1. E‑file – Filing electronically is common and speeds processing while reducing errors.
   
   
2. Schedule E – Double‑check that your income and expenses balance.
   
   
3. Tax Software – Many programs have a "Rental Property" module that automates depreciation and expense tracking.
   
   
4. Professional Advice – For significant rental income or uncertainty about passive loss limits, consult a CPA who specializes in real estate taxes.
   
   

COMMON PITFALLS

• Mixing Personal and Rental Expenses – Personal utilities or mortgage payments must be divided if they serve both personal and rental purposes.
  
  
• Improvement vs. Repair – Adding a new bathroom is an improvement, thus depreciated, not deducted in the purchase year.
  
  
• Unreported Security Deposits – If you keep a security deposit that is not returned, it is considered income.
  
  
• Failure to File Schedule E – Not filing this form can lead to penalties and increased IRS scrutiny.
  
  

CONCLUSION

Side rentals may boost a salaried worker’s income, yet they carry tax duties distinct from your regular paycheck. By accurately reporting rental income, taking advantage of legitimate deductions, and staying organized, you can keep your tax liability low and avoid costly mistakes. Keep records tidy, monitor passive loss limits, and, when unsure, consult professionals to keep your side rental profitable and compliant.