Salaried employees owning a rental side venture can gain supplemental earnings, yet they must handle new tax obligations. Here’s what you should know to stay compliant, limit liability, and fully utilize deductions.

INTRODUCTION

If you get a regular paycheck and own a rental home, the IRS considers the rental income passive. Even if you’re not a full‑time landlord, the same rules for all renters apply to you. Knowing these rules in advance can prevent surprises on your return.

TAXABLE INCOME FROM RENTALS

1. Gross Rental Income – Add together every rent payment you receive during the year. Include any security deposits that are actually returned to tenants.
   
   
2. Extra Income – Charges 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 subtract ordinary and necessary expenses from your gross rental income. Common deductions include:

• Mortgage interest plus property taxes
  
• Insurance premiums for 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, moving expenses, and office supplies used for rental operations
  
  

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). Residential properties recover over 27.5 years. You can use IRS depreciation tables or a spreadsheet to monitor it.

SPECIAL RULES FOR SALARIED WORKERS

Because payroll tax withholding is already in place, the IRS won’t double‑tax your rental income. Yet, you must pay self‑employment tax if your rental activity is deemed a trade or business. In most cases, residential rentals are treated as passive, so the 15.3% self‑employment tax does not apply. Should you actively manage the rental—performing frequent repairs, showing the property, or offering significant services—the IRS may consider it a business, thereby 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. If your AGI goes over $100,000, the deduction starts to phase out. Salaried workers need to keep an eye on their AGI to see if they qualify for the benefit.

STATE AND LOCAL TAXES

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

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

Consult your state tax agency for 節税対策 無料相談 specific deadlines and forms.

RECORD KEEPING BEST PRACTICES

• Keep a separate bank account for rental income and expenses
  
• Store receipts, invoices, and bank statements electronically
  
• Maintain a mileage log if you drive 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 – Verify that income and expenses balance.
   
   
3. Tax Software – Many programs have a "Rental Property" module that automates depreciation and expense tracking.
   
   
4. Professional Advice – If your rental income is large or you’re unsure about passive loss limits, seek a CPA specializing in real estate taxation.
   
   

COMMON PITFALLS

• Mixing Personal and Rental Expenses – Personal utilities or mortgage payments must be apportioned 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 – Omitting this form may trigger penalties and IRS scrutiny.
  
  

CONCLUSION

Side rentals can be a valuable supplement to a salaried worker’s income, but they come with tax responsibilities that differ from your regular paycheck. Reporting rental income accurately, using legitimate deductions, and staying organized keeps tax liability low and prevents costly errors. Keep records tidy, monitor passive loss limits, and, when unsure, consult professionals to keep your side rental profitable and compliant.