Employees with side rental properties can earn additional income, but they also face a new set of tax responsibilities. 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 receive a steady salary and own a rental property, the IRS views the rental income as passive. Even though you’re not a full‑time landlord, the same rules that apply to anyone who rents property apply to you. Understanding these rules early can help you avoid surprises when you file your return.

TAXABLE INCOME FROM RENTALS

1. Total Rental Income – Sum all rent payments received during the year. Add any security deposits that are refunded to tenants.
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4. Extra Income – Charges for parking, laundry, or other services are taxable.
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7. Reporting – Schedule E (Supplemental Income and Loss) is where you report rental income and expenses, then attach it to Form 1040.
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DEDUCTIBLE EXPENSES

You may deduct ordinary and necessary expenses from your gross rental income. Commonly deductible items include:

• Mortgage interest plus property taxes
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• Insurance premiums covering the rental property
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• Repairs but not improvements
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• Utilities paid by you for tenants
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• Professional services (accounting, legal, property management)
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• Depreciation of the building, excluding the land
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• Advertising to attract tenants, moving costs, and office supplies for rental work
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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 uses the Modified Accelerated Cost Recovery System (MACRS). Residential properties recover over 27.5 years. You can use the IRS depreciation tables or a spreadsheet to keep track.

SPECIAL RULES FOR SALARIED WORKERS

Because payroll tax withholding is already in place, the IRS won’t double‑tax your rental income. However, you must still pay self‑employment tax if your rental activity is considered a trade or business. Usually, residential rentals are passive, so the 15.3% self‑employment tax does not apply. If you actively manage the rental—frequent repairs, showing the property, or offering major services—the IRS may treat it as a business, triggering self‑employment tax.

CONSOLIDATED DEDUCTIONS

If your rental loss is below $25,000 and you file a joint return, you might offset up to $25,000 of ordinary income, given you meet the "active participation" test. When your adjusted gross income surpasses $100,000, the deduction gradually phases out. Salaried employees should monitor their AGI closely to determine if they qualify for this benefit.

STATE AND LOCAL TAXES

Many states tax rental income like the federal government does, but some add extra requirements:

• California: Must file a real property tax return (Form 593) when owning a rental in California
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• New York: Requires a separate filing for rental income, and may impose an additional local tax in certain jurisdictions
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Verify with your state tax authority to find filing deadlines and required forms.

RECORD KEEPING BEST PRACTICES

• Maintain a dedicated bank account for rental income and expenses
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• Keep receipts, invoices, and bank statements in electronic form
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• Maintain a mileage log if you drive to the property for repairs or tenant meetings
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• Maintain a calendar of major repairs and improvements to aid depreciation calculations
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FILING TIPS

1. E‑file – Electronic filing is standard and accelerates processing and cuts errors.
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4. Schedule E – Verify that income and expenses balance.
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7. Tax Software – Many programs have a "Rental Property" module that automates depreciation and expense tracking.
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10. Professional Advice – For significant rental income or uncertainty about passive loss limits, consult a CPA who specializes in real estate taxes.
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COMMON PITFALLS

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

Side rentals can enhance a salaried worker’s income, though they involve tax obligations that differ 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, 節税対策 無料相談 when unsure, consult professionals to keep your side rental profitable and compliant.