2023 Federal Tax Brackets on Rental Income: A Guide for Rental Home Owners

In the 2023 tax year, federal income tax brackets changed to account for high rates of inflation. That means if you own one or more rental properties, you'll need to brush up on the 2023 tax rates on rental income.

While we can’t provide personalized advice for your exact tax situation, find out how the 2023 income tax brackets could impact you this tax season. 

2023 federal tax brackets and tax rates by filing status

In the 2023 tax year, income limits changed for all tax brackets. These changes accommodate the high rate of inflation from the 2022 tax year.

The U.S. has a progressive tax system which means your tax rate increases as your income grows. Tax rates in the United States range from 10% to 37%. That means even if you earn $500,000, you won't pay 37% on the entire amount. The first 11,000 will be 10% and so forth.

Federal tax brackets also vary based on filing status (individual, joint or head of household). The Tax Foundation lists the following federal income tax rates for 2023:

2023 Income Tax Rates for Single Filers:

• 0 to $11,000 = 10% tax rate

• $11,000 to $44,725 = 12% tax rate

• $44,725 to $95,375 = 22% tax rate

• $95,375 to $182,100 = 24% tax rate

• $182,100 to $231,250 = 32% tax rate

• $231,250 to $578,125 = 35% tax rate

• $578,125 or more = 37% tax rate

2023 Income Tax Rates for Married Individuals Filing Joint Returns:

• $0 to $22,000 = 10% tax rate

• $22,000 to $89,450 = 12% tax rate

• $89,450 to $190,750 = 22% tax rate

• $190,750 to $364,200 = 24% tax rate

• $364,200 to $462,500 = 32% tax rate

• $462,500 to $693,750 = 35% tax rate

• $693,750 or more = 37% tax rate

2023 Income Tax Rates for Heads of Households:

• $0 to $15,700 = 10% tax rate

• $15,700 to $59,850 = 12% tax rate

• $59,850 to $95,350 = 22% tax rate

• $95,350 to $182,100 = 24% tax rate

• $182,100 to $231,250 = 32% tax rate

• $231,250 to $578,100 = 35% tax rate

• $578,100 or more = 37% tax rate

How is rental income taxed for investment properties?

Anyone who rents out their home will have federal tax responsibilities. Income from a rental property is taxed as ordinary income. This is why it’s important to note the 2023 changes in tax brackets, as your rental income will affect the rate in which your income is taxed at. How much you earn from your salary will impact the tax bracket your rental income falls into.

Landlords need to report all rental income on their personal tax returns, along with documented expenses. Expenses include mortgage interest, property tax, maintenance and repairs. You can use most of these expenses to lower your tax bill by claiming them as deductions. You can even deduct the cost of hiring an accountant or tax professional to maximize your claim.

The deductions you are eligible to claim will vary based on how you and your tenants use the home. For example, a home with a 12-month lease agreement is a long-term rental and will owe tax on any income. 

If you live in the home and only rent it out for two weeks a year, you may not need to declare any income. Below is an outline of the federal tax rules based on how your property is used as a rental vs residence. 

Federal taxes on rental income for a personal home

If you live in the home most of the time, you may not need to pay tax on the income. If a home is rented for 14 days or less, it's considered a personal residence for tax purposes. This means you don't need to declare income, but also won't be able to claim any rental expenses either.

Federal taxes on rental income for a rental property

Your home is considered a rental property if it's rented for 15 days or more. That means any home used as a regular vacation rental or on a lease agreement will owe tax on rental income. You will need to keep accurate records of all income and expenses.

If you spend any time in the home, you can only deduct expenses for the percentage of the time the home was rented. See below for the '10% rule' which may apply in this scenario.

Federal taxes on rental income for a short-term vacation rental

There is a tax rule known as the "10% rule", which applies to homes used as a short-term vacation rental. If you use the home for more than 14 days, or 10% of the total days the home was rented, you can't deduct any rental losses. This is because the home is considered your personal residence for tax purposes. Some tax deductions will still apply, but to a limited extent.

Federal taxes when your home is not rented for profit

If you don’t rent your property to make a profit, you can’t deduct expenses that exceed the rental income received. You can’t claim a loss or carry forward any rental expenses that are higher than the income received for the year. 

If your rental income is more than your expenses for three years out of five consecutive years, your rental property is profitable for tax.

How to work out tax when there’s a change to rental use

What happens if you fall somewhere between? You used to live in the home but decide to move out and use it as a full-time rental? Or add an ADU part-way through the year and rent it out?

If you change your home (or a part of it) to rental use at any time, you must divide yearly expenses between rental use and personal use.

For example, if your home was a rental for 25% of the year, you would deduct 25% of the yearly cost of mortgage interest and insurance.

If you rent part of your property, you must treat them as seperate homes, dividing expenses.

Rental income tax in summary

To recap, rental income (minus expenses) is tax progressively, based on the tax bracket for your total income. For a more in-depth look at rental real estate income, read the IRS Guide: Tips on Rental Real Estate Income, Deductions and Recordkeeping.

How to calculate your rental income for the 2023 tax year

To calculate your rental property income for the 2023 tax year, you need to work out your income minus expenses. To do this accurately, it's advisable to get help from an accountant. If your rental home is eligible for deductions, this cost can be claimed as an expense.

What to include in rental income for tax:

• Rent collected from tenants or guests
• Any prepaid rental amount for future rent
• Any security deposits that weren't returned to tenants
• Extra fees such as pet bond or lease cancellation

What to exclude from rental income for tax:

• Security deposits still held (these should be on a balance sheet for short-term liability but are not income)

Rental property tax deductions 

Homes cost money to run and these expenses lower your reportable income in the tax year.

Common rental property tax deductions include:

• HOA fees
• Advertising and marketing 
• Landlord insurance or short-term rental insurance 
• Cleaning fees
• Repairs and maintenance
• Legal or professional fees
• Mortgage interest 
• Property taxes
• Utilities paid for
• Pest control
• and other essential services

Property management for a rental property is tax-deductible as professional fees. This also means you can claim fees from Belong. Although Belong is not a traditional property management company, Belong takes on the responsibility of looking after your home and residents, so you can include fees and maintenance from our extensive vendor network as deductions in your tax return.

To report rental tax income and deductions, you or your accountant will need to complete Schedule E: Supplemental Income and Loss, Form 1040 or 1040-SR.

How to calculate your rental property depreciation

Calculating depreciation is another important step in working out your tax liability. Depreciation is the loss of value on the physical property, excluding the land value.

Why? Well most things that are 10 or 20 years old are worth less than when they were new. But property usually appreciates in value over time. This is because the value of the land increases. So to calculate loss of value on the home structure, depreciation applies for the life of the property or 27.5 years. The value of the house and contents (excluding land) is divided by 27.5 years to calculate depreciation.

A tax professional can identify the right depreciation amount for your rental property, which could include:

• The value of the actual home, regardless of condition
• The added value from renovations or remodeling
• Included furniture and fixtures
• The value of adding new features to the home such as a deck or landscaping
• Upgrading the appliances to energy-efficient ones
• Installing a new HVAC
• Architect, surveying, or structural engineering fees
• Labor and material costs from renovations (not essential repairs)

To report depreciation, you will need IRS Form 4562.

A rental property can’t be depreciated if you stop using it as a rental in the same year. Vacancy between residents is fine, but if you sell the home or it's taken out of rental service, you can't claim depreciation in that year. But if you sell the home to buy a similar investment property, you could be eligible for a 1031 exchange or “like-kind” exchange. 1031 exchanges allow you to defer capital gains tax, giving you more net cash to invest in a replacement property.

For more detailed information, you can review IRS Publication 946: How to depreciate property. 

Other tax implications to consider in 2023

If you inherited your rental home, intend to sell up or conduct business as a non-corporate landlord, here are some more tax implications to consider in 2023. 

Tax implications for inheriting a property

If you have inherited a home in 2023, there are further taxes you need to be aware of, including:

• Federal estate tax
• State estate tax (Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii and Washington, D.C)
• State inheritance estate tax (Iowa, Kentucky, Maryland, New Jersey or Pennsylvania)
• Federal gift tax

To read up on the ins-and-outs of taxation on a home after a loved one has passed, read Tax Considerations for Inherited Properties.

QBI Deductions

If you are a non-corporate landlord, you may qualify for the or Qualified Business Income (QBI) Deduction.

The section 199A deduction or QBI, lets qualified landlords deduct up to 20% of their rental income from an investment property.

In 2023, limits on the QBI deduction are phasing in for individual taxpayers with an income over $182,100, or $364,200 for joint filers. 

Capital gains tax

When you sell an investment property, capital gains tax applies to the difference in value from your purchase price. If you sell a rental property at a profit after owning it for at least one year, you will owe capital gains tax on that amount. The IRS provides detailed information on capital gains tax here.

It's important to note that capital gains are taxed on different brackets and rates to income tax.

The 2023 Capital Gains Tax Brackets are:

• For Unmarried Individuals, Taxable Income Over $0 = 0%

• For Unmarried Individuals, Taxable Income Over $44,625 = 15%

• For Unmarried Individuals, Taxable Income Over $492,300 = 20%

• For Married Individuals Filing Joint Returns, Taxable Income Over $0 = 0%

• For Married Individuals Filing Joint Returns, Taxable Income Over $89,250 = 15%

• For Married Individuals Filing Joint Returns, Taxable Income Over $553,850 = 20%

• For Heads of Households, Taxable Income Over $0 = 0%

• For Heads of Households, Taxable Income Over $59,750 = 15%

• For Heads of Households, Taxable Income Over $523,050 = 20%

If you have lived in your home before putting it on the rental market, you could be exempt from capital gains when it comes time to sell. Homeowners are exempt from up to $250k (if single) and $500k (if married) of capital gains on the sale of a primary residence. To qualify, you must have occupied the home for two of the last five years, though they need not be consecutive. Spouses filing jointly must both have occupied the property. This exemption is only allowable once every two years.

If you don’t qualify for the exemption, you can limit your tax liability by keeping good records of all improvements made to the home. As mentioned above, this is because they can be used under depreciation to reduce capital gain. 

Belong simplifies tax time for rental homeowners

Managing the paperwork and tracking expenses from a rental property gets complicated fast. Especially if you own more than one home or decide to manage the work yourself. By partnering with a modern company like Belong, everything gets easier. 

Belong makes managing your rental property taxes easier, because you always know where you stand. Belong offers guaranteed rent, so you always know exactly how much you will earn and when, regardless of when rent is paid.

Belong homeowners can also manage all maintenance and repairs through the Belong app, giving you full visibility over your property income and expenses in one place. 

Each year we'll send you a statement for you or your accountant to work through. Plus, your concierge is on hand to assist if you need to clarify any information about earnings or charges. And did we mention that Belong fees are tax deductible?

Belong is simplifying the rental experience across the US and helping more homeowners reach their financial goals with the most hassle-free property management service; BelongPro.

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