What Retirees Need To Know While Filing Taxes for Income From Rental Properties
Written by
Heather Taylor
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Amber Barkley
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Chances are, if you’re a retiree who earns income through a rental property, you may have some questions when it comes time to file taxes. What does the IRS consider to be rental income? Should you declare this income using the cash basis or accrual accounting method? And what can owners of these rental properties deduct from their taxes?
To find out the answers to these and other common rental property tax questions, GOBankingRates spoke to Crystal Stranger, EA and CEO at Optic Tax. Here’s what retirees with rental properties need to know about filing taxes for income.
What Does the IRS Consider Rental Income?
According to Stranger, individuals who rent their house or another property that they own for more than two weeks each year most likely have rental income. While generally rental income is related to rental of real estate, it can also be rental of personal property.
What if retirees rent these properties for less than two weeks per year? In that case, Stranger said they would qualify for the de minimus exception. You would not need to report this income.
Cash Basis and Accrual Basis of Accounting: Which Method Is Best for Declaring Rental Income?
Taxpayers may account for rental income and other related expenses using either the cash basis or accrual basis accounting method.
Of the two options, cash basis tends to be most preferred by taxpayers. Stranger said this is because the cash basis reflects what you see in your bank account. It also tends to be the most beneficial way of reporting rental income for house rentals.
Retirees that receive a lot of pre-payments may consider using accrual basis instead. This is when the income and expenses are tied to when the income is earned rather than when you receive the money.
However, Stranger warns against using the accrual basis method due to its complicated nature. This method is only worth looking into in the event retirees stand to receive substantial savings.
Where Are the Biggest Tax Savings on a Rental Property?
Typically, retirees with rental properties can deduct various operating expenses, like utilities and gardening to upkeep their home, on their taxes. Where they stand to receive the greatest tax savings, however, is through depreciation.
How do you calculate this? Stranger said you can deduct a portion of the purchase price of your home each year against the profits. But it’s not easy to do. There are many rules to follow to make the correct calculations — Stranger noted removing the land value as an example.
Retirees are also recommended to watch repairs closely as an expense category.
“If the repairs are a renovation that improves the house, the cost must be depreciated rather than deducted,” said Stranger.
Retirees seeking even more tax savings from depreciation may explore Cost Segregation studies for faster depreciation schedules on certain assets. However, Stranger said this is generally only done in high-profit scenarios. The cost of the study, she said, would need to be a reasonable investment for the ability to reinvest the tax savings.
Where Do You Report Rental Income?
Generally, taxpayers will report rental income on Schedule E with their personal tax return.
However, if you own rental property in a limited liability company (LLC) alongside others, Stranger said you may need to report it as a partnership. This would be done in a separate tax return, using Form 8825 inside the partnership return.
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