How to Calculate Net Rental Income
Net rental income is the income you receive from your rental property after expenses associated with the home are deducted. If you re a landlord, you ll need to report the income on your tax return, even if you don t make a profit. You must complete Schedule E, Supplemental Income and Loss, of Form 1040 when you file your taxes. Fortunately, the IRS allows many deductions for rental properties to help lower the taxable income.
Calculate the rent collected on each property during the tax year. You won t need to submit receipts or proof of income with your tax return, but you ll want to maintain them for your records in the event of an audit. The IRS recommends keeping records for three years from the date you filed the return or two years from the date the tax is paid, whichever date is later. However, if a substantial error is made, the IRS can actually go back six years.
Report the rent on line 3 of your Schedule E. If you have multiple properties, list each home on a separate column. The columns are labeled A, B and C.
List expenses on lines 5 through 19. Each line of the form has a different expense listed. For example, line 5 is for advertising, line 6 is for auto and travel expenses, line 7 is for cleaning and maintenance. Other expenses to report include repairs, taxes, insurance, management fees, mortgage interest, utilities and depreciation. You can also deduct lawn care, pest control and losses from theft or other casualties. If you have more than one home you re reporting, make sure you re reporting the expenses for each property in the appropriate column.
Add up the total of all reported expenses associated with the rental property and write it on line 20. List additional homes on line 20b and 20c.
Subtract the amount indicated on line 20 from the total rent collected as reported on line 3 for the property.
List the total on line 21 to get your net rental income. Continue to list additional properties separately. If the number is negative, you ll have a loss. If the number is positive, it s a profit and subject to income taxes.