What counts as rental income for tax purposes

5 Replies

I’m preparing to buy my first rental property soon. My question is about the taxable portion of the rental income, specifically, money that is set aside for repairs, vacancy and capX. Is that money considered as income when it comes tax time?

I know there are lots of deductions that minimize/erase the tax burden, I’m just not sure if money sitting in an account for the above expenses is also taxable.


Hey @Adam Aust .  Good question but any income that has not been spent on the categories you described would be considered taxable.  The income is taxed until it is spent on maintaining the property.  

@Adam Aust   I am still what I would consider a new-be, but here are the lessons I have learned.  Make sure to start on good footing.

Right from the start separate you personal money and business money.  Different bank accounts and such.  The first year I was excited and wrote off a ton, getting the business up and running.  So much so that I used the paper loss to shelter W-2 income.  I was super smart doing that until I went into the bank to get another loan.  Showing a loss on the rental went against my debit to income.  I.E. a $1,200 loss was like having another $100 a month loan.

Some of the things I wrote off were

Power tools needed for the business, lawyer and accountant bills, mileage, office supplies, new printer, storage area .....

If you want to grow bigger than 1 rental, make sure to understand what a gain/loss will do to your buying power. 

Once you have multiple rentals you can spread professional services over them and it is much easier to "make money"

We have a separate account where we put all of the repair, vacancy, cap-ex, taxes, insurance.  It makes it easier to track what our operating capitol is.

Good luck

@Adam Aust   That is correct.  All the tax man cares about is the difference between the price you bought it for + put into it and selling price.  There are some other stuff in there, but I would not get hung up on it until you need to know.  One of my mentors told me a long time ago that laws and rules change, so the answer you get today may not be worth anything in the future.

To better answer your question though.  If you buy a rental for 100K, and do 25K in improvements your basis when you sell is roughly $125K.  That is whether you paid cash or don't have a dime of your own money in it.   You sell for 200K you would owe Capitol Gains on 75K (if you owned for longer than 1 year)  This is a simple explanation.  If you paid 6% (12K) in commission than the capitol gains would be on 63K.  If you own it less than a year the profit is taxes as ordinary income and is subject to whatever tax bracket you are in for your W-2 job.