Summary of What This Blog Covers:
- Explains How Rental Income Is Taxed and What Investors Must Report
The blog outlines how rental income is classified by the IRS, what counts as taxable income (including advance rent and kept deposits), and how real estate investors can reduce their tax liability through strategic expense deductions. - Covers Key Real Estate Tax Deductions and Depreciation Strategies
From mortgage interest and property taxes to depreciation and property management fees, this guide helps landlords identify commonly missed deductions and optimize their tax savings with the help of an experienced Austin, Texas CPA. - Breaks Down Passive Loss Limitations and How to Legally Work Around Them
The post explains the IRS’s passive activity rules and introduces two powerful strategies (Real Estate Professional Status (REPS) and the short-term rental loophole) that allow high-income earners to deduct real estate losses against other income. - Highlights Long-Term Tax Planning Tools Like 1031 Exchanges and Compliance Must-Haves
The blog walks through what happens at sale including depreciation recapture and how a properly executed 1031 exchange can defer taxes, while also emphasizing the importance of compliance tasks like issuing W9s, 1099 NECs, and FBAR filings.
Filing Taxes on Your Rental Property? Let’s Make Sure You’re Doing It Right
Owning rental property is a powerful way to build wealth. Cash flow, long-term appreciation, leverage, you know the drill. But when tax season rolls around, many investors start asking, “Wait… am I doing this right?”
Spoiler alert: If your current tax planning consists of dumping a stack of receipts on your accountant’s desk and crossing your fingers, it’s time for an upgrade.
At Insogna CPA, a real estate-focused Austin, Texas CPA firm, we work with property owners who want to do more than file on time. They want to build a tax strategy that protects their profits.
Whether you’re new to rental income or scaling a multi-state portfolio, here’s what you need to know before filing your next return.
How Rental Income Is Taxed and How to Keep More of It
Let’s start at the beginning.
Yes, rental income is taxable, but the rules are very different from how your W-2 or business income is taxed.
What counts as rental income?
- Rent payments from tenants
- Advance rent (even if it’s for future months)
- Lease cancellation fees
- Kept security deposits (if applied toward unpaid rent or repairs)
What’s not income (yet)?
- Security deposits that are refundable
- Expense reimbursements (as long as they’re directly related)
Here’s the good news:
- Rental income is considered passive, so it’s not subject to self-employment tax
- You’re only taxed on net income—meaning, after deductions
- You report everything on Schedule E, which flows through to your personal return
Smart planning from a CPA in Austin, Texas means structuring things correctly so you’re only taxed on the income you keep, not the gross rent you collect.
The Real Estate Investor’s Deduction Playbook
This is where strategy really starts to pay off.
Real estate investors have access to one of the longest deduction lists in the tax code and every one of them directly reduces taxable income.
Common deductions include:
- Mortgage interest
- Property taxes
- Depreciation (a major one—more on that soon)
- Repairs and maintenance
- Insurance premiums
- Utilities (if paid by you)
- HOA or condo fees
- Property management costs
- Advertising and marketing expenses
- Travel and mileage related to managing the property
- Legal and professional fees, including your Austin tax accountant
Deductions investors often miss:
- Cell phone or internet costs (if used for managing rentals)
- Subscriptions to real estate publications or tools
- Home office expenses if you manage from home
- Bank fees and interest on property-related loans
At Insogna CPA, we provide real estate-specific services accounting so you can track every deduction with confidence and ensure you’re claiming every dollar you deserve.
Depreciation: Your Secret Weapon for Long-Term Tax Savings
If you own rental property and you’re not using depreciation, you’re giving away free money to the IRS.
What is depreciation?
It’s a non-cash deduction that allows you to write off the cost of your rental building (not the land) over 27.5 years for residential properties.
Example:
Buy a rental for $500,000
Allocate $400,000 to the building
Divide that by 27.5 years
That’s over $14,500/year in deductions, every year, no out-of-pocket cost required
This deduction alone can wipe out your taxable rental income if used properly.
Even better? You can accelerate this deduction with a cost segregation study, which we coordinate for clients at Insogna CPA, one of the most experienced CPA firms in Austin, Texas for real estate.
Passive Activity Loss Rules: What They Are and How to Work Around Them
The IRS classifies rental income as passive, and this classification limits how much you can deduct.
Key rules:
- Passive losses can only offset passive income
- If your income is under $100,000, you may be able to deduct up to $25,000 in passive losses
- Between $100,000 and $150,000, that deduction phases out
- Above $150,000? Passive losses are carried forward unless you qualify for an exception
That means many high-income earners end up sitting on “paper losses” they can’t use. Unless…
1. Real Estate Professional Status (REPS)
If you or your spouse:
- Spend 750+ hours/year on real estate
- And more than 50% of your working hours are in real estate…
…you may qualify as a real estate professional, and your rental losses can offset active income.
We help clients qualify and document this status with help from our team of certified public accountants, taxation accountants, and enrolled agents. Because when done right, REPS can unlock massive tax savings.
2. Short-Term Rental Loophole
Even if you don’t qualify for REPS, you can still use losses to offset other income if you own a short-term rental.
Requirements:
- The average guest stay is under 7 days
- You materially participate (manage or oversee operations)
This turns your short-term rental into non-passive income, allowing you to deduct depreciation and other losses against your day-job income.
STRs are one of the most powerful tools in the code when used correctly. That’s where your tax advisor near you comes in.
What Happens When You Sell Your Property?
Depreciation Recapture
All those depreciation deductions? The IRS remembers them when you sell.
You may have to pay depreciation recapture tax, typically at 25% of the amount you’ve depreciated.
Solution? A 1031 Exchange
A 1031 exchange lets you sell a property and reinvest in a new one, deferring taxes on both capital gains and depreciation recapture.
We’ve helped clients across multiple states successfully execute exchanges that saved tens of thousands in taxes.
If you’re selling, talk to a certified CPA near you before you list. A smart plan today can save you a fortune tomorrow.
Don’t Skip the Compliance Details
Great tax planning means nothing if you forget to file the right forms.
At Insogna CPA, we help investors stay audit-ready and stress-free with:
- Schedule E vs. Schedule C reporting
- W9 tax forms for contractors
- 1099 NEC filings for vendors paid over $600
- FBAR filing if rental income touches foreign accounts
- Multi-state filings for out-of-state investments
Our Austin accounting service includes quarterly reviews, estimated payment tracking, and audit protection because compliance isn’t optional, and neither is peace of mind.
Real Estate Tax Planning Checklist
Use this before you file:
✔ Classify property type and structure (LLC, personal, S-corp)
✔ Separate land and building for depreciation
✔ Claim every possible deduction
✔ Create and manage a depreciation schedule
✔ Explore cost segregation for properties over $500,000
✔ Determine if REPS or STR rules apply
✔ Use 1031 exchange to defer gains if selling
✔ File required forms: W9, 1099 NEC, FBAR
✔ Work with a licensed CPA who specializes in real estate
Why Investors Choose Insogna CPA
We’re more than just a tax preparer near you. We’re a full-service tax and accounting partner who helps you scale smarter.
What we bring:
- Deep experience in real estate tax law
- Full team of certified CPAs, chartered professional accountants, and certified general accountants
- Real-world knowledge of Austin accounting and national investment structures
- Personalized, year-round support, not just during tax season
- Strategic planning, including 1031 exchange support, entity structuring, and cost segregation analysis
If you’re managing even a single rental, you deserve a team that understands the tax landscape inside and out.
Book Your Strategy Session Today
Ready to stop guessing and start saving?
At Insogna CPA, your go-to Austin, TX accountant, we help real estate investors build tax strategies that grow with their portfolios.
Whether you need tax help for a new rental, a better bookkeeping system, or advanced real estate tax planning, we’ve got you covered.
Schedule your consultation today and let’s build a filing plan that’s not just IRS-ready but wealth-ready...`