All businesses must pay taxes to federal, state, and local authorities. But there are dozens of kinds of taxes. Do you know which taxes your rental property business is required to file and pay? As the business owner, you’re responsible for meeting all the tax obligations associated with your business. We’ve put together an overview of the different tax types your real estate investment business may qualify for.
Federal Taxes
There are four main taxes to watch out for at the federal level.
1) Income Taxes
When your business generates income, you pay taxes based on the income, both at the federal and state level. Your business structure affects your income tax obligations.
Sole Proprietorship
Sole proprietorships pay income taxes on the individual level. You’ll use Form 1040 to report them.
Partnerships and S Corporations
Rental property businesses structured as partnerships or S corporations file separate returns to report business income or losses. You’ll report your income or losses at the entity level first. However, a partnership or S corporation doesn’t pay federal taxes at the entity level.
Owners must report the income or losses on their individual Schedule K-1 forms. Then the taxes due are determined by which tax bracket the owner falls into.
C Corporations
If you are a shareholder of a C corporation, you’ll end up paying income taxes twice, once at the corporate level and once at the shareholder level. The taxes are based on the net income of the business at the entity level.
When shareholders receive dividends, they are taxed on the shareholder’s personal return.
2) Estimated Taxes
Estimated taxes for businesses are required quarterly. If you structured your rental property business as a C corporation, and you expect to owe more than $500, you must pay estimated taxes.
All other business entities must pay estimated taxes if the taxpayer is likely to owe more than $500 on their individual return.
Set up a few calendar reminders for your estimated tax due dates for 2023:
- January 17, 2023
- April 18, 2023
- June 15, 2023
- September 15, 2023
- January 16, 2024
If the due date is a holiday or weekend, file your taxes by the following business day.
3) Self-Employment Taxes
Investing in rental real estate is typically considered passive income, which is exempt from self-employment tax.
When you earn more than $400 from business activities, you’re required to report self-employed income. Your income will be taxed at the self-employed tax rate. For 2023, the rate is 15.3%. That’s 12.4% for Social Security and 2.9% for Medicare.
However, if you provide substantial additional services or are a real estate professional, you may qualify for self-employment taxes. Since you’re self-employed, you’re responsible for paying both the employee and employer portion of Social Security and Medicare taxes. Consult your financial professional for confirmation on whether or not self-employment taxes apply to your specific situation.
4) Employment Taxes
Does your rental property business have employees? If so, you are responsible for payroll taxes at both the federal and state level. These taxes are a combination of the employer portion and deductions from employees’ paychecks. They have several components:
- Social Security and Medicare: 12.4%, a combined total of employee and employer payments
- Federal and state income tax withholding: the amount withheld varies based on employees’ W-4 allowances claimed
- Federal unemployment tax: 6% on the first $7,000 of income for each employee
- State unemployment tax: rates vary by state and may differ from the federal rate
State and Local Taxes
Your location, as well as your properties’ locations, will determine which state taxes you must file and pay. These five types of taxes are the ones your rental property business is most likely to qualify for.
5) Property Taxes
Businesses that own real estate must pay property taxes based on the assessed value of the property. The value is determined by multiplying the property tax rate by the percentage of the property’s value that is taxed. Don’t confuse this with the fair market value of your property.
When you buy a property, you’ll register it with the state or local government. After that, you’ll receive information about any changes in the assessed value of the property. The taxes due are based on that assessment.
6) Business Personal Property Taxes
If your rental property business owns fixed assets, you’ll have to file business personal property taxes. Think about some items on your balance sheet:
- Furniture
- Fixtures
- Computer Equipment
- Machinery
- Tools
- Heavy Equipment
These are the items you pay business personal property taxes on. Even if your assets are fully depreciated, some states will still require you to pay taxes on them yearly.
7) Transient Occupancy Taxes
If you offer short-term rentals (usually 30 days or fewer), then you may be subject to transient occupancy taxes. This covers more than just hotels, inns, or hostels. Rental homes, cabins, boarding houses, rented guest rooms, and other rented accommodations all qualify. So, if you’re a house hacker, vacation rental business, or Airbnb host, you’ll want to check with your tax preparer about this tax.
8) Short-Term Rental Taxes
Your local government will determine what qualifies as a short-term rental for tax purposes. In some areas, a short-term rental can last for 92 consecutive days. Sometimes you must get certified as a short-term rental company when the business first opens, then get recertified each year. Your lawyer and tax preparer can help you determine what the requirements are for your area and if this tax applies to your situation.
9) Sales Taxes
If your rental property business offers any additional services, you may be subject to sales taxes. Consider these situations:
- You offer commercial building maintenance, like cleaning or janitorial services, as part of your rental agreement.
- Your real estate investment property is a parking lot.
- You provide meals for your renters.
- You provide guided tours.
- Your rental agreement includes lawn care services.
- Your rental agreement lets you bill for repair services and materials.
Sales tax rates vary by both state and locality, so the requirements differ. Consult with your tax preparer to determine what the requirements are in your area and if they apply to your business.
Takeaways
No matter which types of tax apply to your rental property business, as the business owner, you’re responsible for the tax obligations. Start by working with your CPA to determine which federal, state, and local taxes you need to pay. Review which forms you need, then create a schedule so you don’t miss any filing deadlines. Have your supporting documentation ready, and review your deductions and credits with REI Hub’s Tax Review feature. If you’re proactive and organized, your real estate investment business will be ready for any tax deadline.
