Here’s What You Need To Know
About Rental Income
A rental business is a great way to make money from your real estate property. You can look forward to receiving a steady stream of active income. With the demand for real estate properties remaining stable, now is the time to venture into a real estate business. Renting out properties is a tried-and-tested business approach that can deliver recurring income.
If you are planning to venture out into this kind of business, it is important for you to know the kind of tax you will incur. The financial benefits are there but you also need to know the taxes associated with leasing or renting out your property. So read on and be guided about rental income.
What is Rental Income Tax?
When engaged in a rental property business, you are subject to pay a certain amount of tax.It is what the government charges in lieu of sales tax since there are no purchases involved but only lease and rentals. It is usually collected by the lessor or landlord as part of the rental payments over the lease contract.
Just like other taxes, rental income tax is subject to the following provisions:
- The gross rental income earned by the rental property and his or her spouse is at least $1,500 or less than P64,000 per month.
- The rental business is the only source of local income of the lessors
- There is no current mortgage or loan taken from the purchase of the property
To compute your pre-tax profit, determine the gross rental income and deduct the expenses and capital allowance from it. The amount of deduction can be somewhere between 40 to 90 percent of the total gross income.
The rental income tax can be established via a standard percentage or by actual incurred costs. The latter may include costs for repairs and maintenance, depreciation, local business taxes, mayor’s permit, and real property tax.
Value Added Tax
With a rental property, you are rendering service to your tenants which make it subject to value-added tax. However, compared to other things that is subject to VAT, rental income is subject to several exemptions:
- A 12% VAT will be charged on residential property leases that meet certain conditions. The VAT is usually shouldered by the tenants but for the purpose of calculations, it is integrated into the landlord’s tax liability.
- Rental properties with payments more than P12,800 per month received by landlords whose annual gross rental income is less than P1,919,5000 are VAT-exempt. However, they are subject to percentage tax at a flat rate of 3 percent levied on the gross rent.
- Rental properties with payments exceeding P12,800 monthly received by landlords whose annual gross rental income exceeds P1,919,500 are subject to VAT.
- Properties whose rental payments are less than P12,800 per month are VAT-exempt.
Rental Income Insurance
While rental income will give you recurring income from leasing out your residential or commercial property, where will you get the income if the property suddenly becomes uninhabitable due to a claim or if there are renovations and your tenants may have to temporarily re-locate? This is where having rental income insurance kicks in. Sometimes referred to as fair rental value coverage, rental income insurance pays for lost income in case the property you are leasing suddenly becomes uninhabitable. It pays up to 12 months worth of rent from lost tenants. You may have to purchase 24 to 36 months of rental insurance coverage.
How To File Rental Income Tax
Rental income tax is filed during the scheduled filing of annual income tax. It is considered as income tax for self-employed individuals, estates, and trusts. If you are earning rental income, you will need to file using BIR Form 1701. The final adjustments or annual income tax return, which covers the previous year, should be filed on or before April 15 of each year. For more information about the documentation for filing rental income tax, you can check the official website of the Bureau of Internal Revenue.