Taxes for Rental Income

3 Replies

This year, I purchased my first three rental properties, have a question about the taxes on that income.

With this new source of income, do I need to be contributing to the taxes due throughout the year similar to how a w-4 takes out money? Or can I just pay whatever tax liability I have when I have that calculated after my taxes have been filed? I do have a “safety” stockpile account where I store money for these purposes: taxes, returned security deposits, etc.

I have a w-2 job and am having taxes taken out for that. I believe that I am withholding more then will actually be needed strictly for w-2 income. If there is some withholding remaining, will that go to rental property tax liability? Or are those two kept separate?

You may have to pay in quarterly estimated taxes (Form 1040-ES) depending on your total tax liability, and how much you have withheld on your W-2. Speak to your CPA; s/he should assist you.

@Emmett Gorman

Depends on how much net income your rentals are generating. I am expecting you might have minimal net income ( NOT cashflow ) from your rental. If that case, your W-2 withholding might be sufficient. 

if your AGI is less than 150k, you have to make lesser of

  1. 100% of the tax shown on your PY return  or
  2. 90% of your tax for the current year. 

If you run your number and think you meet these, you should be fine. 

If not as @Lance Lvovsky  mentioned that you need to make an estimated payment each quarter for the amount of the tax you will owe. You just can't wait until the end of the year when you file taxes to pay your entire tax. That is exactly why the government wants an employer to withhold with each paycheck. 

Also If you dont make an adequate payment each quarter(25% of either of those two amounts from above) you will have an underpayment penalty. 

GOOD NEWS: Since you have a W-2 job, you can ask your employer to withhold more during the last few months. Income tax withheld by an employer from an employee's wages or salary is treated as paid in equal amounts on each of the four installments. Thus, if you ask your employer to withhold additional amounts for the rest of the year, the penalty can be retroactively eliminated. This is because the heavy year-end withholding will be treated as paid equally over the four installment due dates.

And yes, as you might have already guessed, your W-2 withholding counts.