If you are someone who owns rental property in California that has tenants who pay you rent, then it is crucial that you declare any rental income that you gain from that property. You can declare your rental income by including it in your tax return. You can also include any expenses incurred due to maintaining the rental property. Read on to find out more on how rental income is taxed in California.
Rental Income That Should Be Declared
All rental income that is required to be declared on your income taxes can be calculated based on either the cash basis method or the accrual method. The cash-based method is all the money that you have received from your tenants in the year. The accrual method is rental that is charged to your tenant (earned by you). The amount charged will be processed towards your tax return, regardless of whether the money was received or not.
If you are a private individual that has a rental property that generates an income, then it should be safe to calculate your income based on the cash you have received for the property. If you prefer to use your tenants deposit as their last payment, then instead of refunding the deposit, you can include that deposit into your calculation.
If your tenant pays for repairs in exchange for a months rent, then you will still have to declare that month, even if you didn’t receive a cash payment. Another form of rental income is when a tenant pays you off to get out of their lease. This cash amount should also be declared.
Expenses That Can Be Deducted From Rental Income
Apart from declaring your rental income, you can also declare expenses related to the property. These expenses can be deducted from your rental income which will, in turn, reduce your tax liability. Some of the expenses eligible for deduction are:
- Operating expenses
- Property taxes
- Mortgage interest
The IRS will also evaluate ordinary expenses such as payments to a building superintendent or property management company as well as necessary expenses such as utilities, maintenance, advertising for vacancies, and other monthly expenses. You will not be able to deduct expenses that you incurred while renovating the property so that it will look better to attract higher-paying tenants.
Rental Income Tax and Property Tax in California
If you own a property in California, you will be liable to pay property tax to the California County. This property tax differs from any form of rental income tax or expenses related to that property. Whether you live at that property or not, if you own it you have to pay the taxes.
That being said, if you are an individual who rents out his property, then you could include your property tax expense along with your rental income and other expenses into your annual tax return. This way, you will not have to make a separate payment at the California Tax Board as the property tax expense can be offset in the tax return you just filed. To accomplish this, you will need to attach a Schedule E (supplemental income and loss) form to your 1040 Form.
Property taxes and tax forms can be complex. It is most possible that you may end up paying a huge chunk of money if you are not doing your calculations correctly or if you are not taking all legal tax deductions you deserve. This is where we come to rescue. At Swift Tax, we understand how the tax code works. We know all the deductions that you can use to get the maximum refund!
How Swift Tax Can Help?
We are conveniently located in the city of Anaheim, Orange County, CA. If you live anywhere near Anaheim or in any city of Orange County and Los Angeles, we can meet and discuss your tax needs. Questions? We will be happy to answer. Give us a call today 714-408-2786.