HMRC use self-assessment tax returns to collect Income Tax from people who receive income from sources other than their salary - e.g. income from rent. Therefore, landlords pay the tax due on rental income by completing a self-assessment tax return.
You fill out a self-assessment tax return every tax year, which runs from 6th April of the current year to 5th April of the following year. HMRC then use these figures to determine how much tax you need to pay. You must keep the receipts from any work you’ve had done on your property when you complete a tax return for a buy-to-let to claim any expenses.
There are 2ways landlords can complete self-assessment:
- You fill out the tax return yourself
- You employ an accountant to self-assess on your behalf
Why Do It Yourself?
Many landlords choose to complete their own tax return as it eliminates the cost of an accountant. Self-assessment isn’t a way to avoid landlord taxes. You need to be honest and thorough if you choose to complete your own self-assessment.
Filing a self-assessment tax return as a landlord involves several steps:
- Register for self-assessment with the tax authorities
- Keep accurate records of all rental income and allowable expenses
- Complete the relevant sections of the self-assessment tax return form
- Report any other sources of income as required
- File the return and pay any tax due by the deadlines set by the tax authorities
- Consider using online filing options to simplify the process
Why Use an Accountant?
Not everyone knows how to file rental income on their taxes. By using an accountant, you’re minimising the risk that you’ll make an avoidable mistake. Your accountant will know how rental income is taxed, what you can claim and which receipts you need to keep.As a general rule,we suggest using an accountant with property taxation experience. They can guide you if there are some decisions to make regarding whether or not to own property in your personal name through a limited company. You can find out morein our guide:How Does a Buy-to-Let Limited Company Work?
FAQs
You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them.
What happens if I don't report rental income? ›
Rental income is considered taxable income and must be reported on your tax return. If unreported it can lead to penalties and interest, audits, criminal charges, or in extreme cases liens and levies.
What is the 2 out of 5 year rule for rental property? ›
If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
Can I move back into my rental and avoid capital gains tax? ›
Can You Move Back Into a Rental to Avoid Capital Gains Tax? Yes, but you need to have owned it for five years and lived in it for two of those five years. The two years do not have to be consecutive, and you can exclude profits up to a certain amount if you sell it.
What expenses can you deduct from rental income? ›
What deductions can I take as an owner of rental property? If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.
How to calculate rental income? ›
Gross yield on a rental property is the percentage of profit before expenses have been deducted. To calculate, first multiply the monthly rent amount by the number of months in the year to determine the income from rent; then, divide the income from rent by the appreciated home value.
How does IRS catch unreported rental income? ›
The Internal Revenue Service (IRS) employs a multifaceted approach to identify rental income, like utilizing audits, data matching, access to public and governmental records, advanced technology for pattern recognition, and information from property management companies.
Is it better to claim rental income or not? ›
The IRS treats rental income as regular income for tax purposes. This means you'll need to add your rental income to any other income sources you may have when you file your taxes. Keep in mind that you may be able to deduct certain qualified expenses to decrease what you owe at the end of the year.
Can I report someone to the IRS for not reporting rental income? ›
Use the Form 3949-A, Information Referral if you suspect an individual or a business is not complying with the tax laws. You can submit Form 3949-A online or by mail. We don't take tax law violation referrals over the phone. We will keep your identity confidential when you file a tax fraud report.
What is the 50% rule in rental property? ›
The 50 Percent Rule is a shortcut that real estate investors can use to quickly predict the total operating expenses that a rental property investment is likely to generate. To work out a property's monthly operating expenses using the 50 rule, you simply multiply the property 's gross rent income by 50%.
The 1% rule states that a rental property's income should be at least 1% of the purchase price. For example, if a rental property is purchased for $200,000, the monthly rental income should be at least $2,000.
What is the 20 percent rule rent? ›
The 30% guideline is one way to look at rent as part of your income. You can also use the 50/30/20 budget as a guide to figure out how much you can afford to spend on rent. This method allocates your take-home pay (after taxes) to 50% for needs, 30% for wants and 20% for savings and additional debt payments.
How do I reinvest rental income to avoid taxes? ›
Use a 1031 Exchange
Section 1031 of the Internal Revenue Code allows you to defer paying capital gains tax on rental properties if you use the proceeds from the sale to purchase another investment.
What happens when you sell a fully depreciated rental property? ›
Depreciation is recaptured and taxed when a rental property is sold. Depreciation recapture tax is based on an investor's federal income tax bracket, up to a maximum of 25%. The impact of depreciation recapture tax can be minimized with a 1031 tax-deferred exchange or an installment sale.
How to avoid depreciation recapture on rental property? ›
If it's important to you to avoid the depreciation recapture tax, there are several strategies you may want to adopt.
- Take advantage of IRS Section 121 exclusion. ...
- Conduct a 1031 exchange. ...
- Pass on the property to your heirs. ...
- Sell the property at a loss.
In most cases, income received from a rental property is treated as passive income for tax purposes.
Is rental income passive or active IRS? ›
Rental income is generally seen as passive, even if an investor actively manages the rental property business. Typically, passive income is subject to your usual marginal tax rate, which is based on your tax bracket.
What is not deductible as a rental expense? ›
Expenses related to traveling to make improvements or renovations to a rental property aren't tax-deductible as these costs are recoverable through depreciation. However, your client may be able to deduct other standard expenses like printing, office supplies, advertising costs, and insurance costs.
Is rental income qualified business income? ›
In many cases, rental income qualifies as business income, provided that the IRS rules are followed. At first, keeping accurate track of income, expenses, and the required record-keeping may seem like a lot of work.
