When you rent a property, you may have to pay taxes.
running a real estate business
You have to pay Class 2 National Insurance if your earnings are £6,725 a year or more and what you do counts as running a business, for example if all of the following apply:
Reading: How much are taxes and insurance on a house
- owning is your main job
- rents more than one property
- buys new properties to rent
If your earnings are less than £6,725, you can make voluntary class 2 national insurance payments, for example, to ensure you receive your full state pension.
property you personally own
The first £1,000 of your property rental income is tax free. this is your ‘property assignment’.
Contact hmrc if your income from renting a property is between £1,000 and £2,500 a year.
You must report it on a self-assessment tax return if you are:
- £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses
register for self-assessment
If you don’t usually file a tax return, you must file by October 5th following the tax year in which you had rental income.
unpaid tax return
You can report unpaid taxes by reporting previous years’ rental income to hmrc. if you have to pay a fine, it will be less than if hmrc found out about the revenue itself.
You will be given a disclosure reference number. then you have 3 months to calculate what you owe and pay it.
See also: Filing an Unemployment Claim
do not include the £1,000 tax-free property allowance for tax years prior to 2017 through 2018.
owned by a company
Count rental income the same as any other business income.
costs you can claim to reduce taxes
There are different tax rules for:
- residential properties
- furnished vacation rentals
- commercial properties
You or your business must pay taxes on the profits you make from renting the property, after deductions for “allowable expenses”.
Allowable expenses are things you need to spend money on in the day-to-day running of the property, such as:
- leasing agent fees
- legal fees for leases of one year or less, or for renewing a lease for less than 50 years
- accountant fees
- buildings and contents insurance
- property maintenance and repairs (but not improvements)
- utility bills, such as gas, water and electricity
- rent, ground rent, utility charges
- city tax
- services you pay for, such as cleaning or gardening
- other direct costs of rent the property, such as phone calls, stationery and advertising
allowable expenses do not include “capital expenses” such as buying a property or renovating it beyond repairs for wear and tear.
You may be able to claim tax relief on money spent on a “household item” replacement. this is called ‘relief replacement of household items’.
household items include:
- crockery and cutlery
You must have purchased the household item for tenant use only at a residential property and the item it replaced must no longer be used at that property.
Household item replacement relief is available at:
- fiscal year 2016 to 2017 for individuals and partnerships
- April 1, 2016 for corporations
furnished residential rentals
See also: How much do braces cost with blue cross dental insurance
you may be able to claim ‘wear and tear allowance’:
- for fiscal year 2015 to 2016 for individuals and partnerships
- on or before March 31, 2016 for corporations
furnished vacation rentals
for furnished vacation homes, you can claim:
- plant and machinery capital allowances on furniture, fixtures and so on on the leased property, as well as on equipment used off the property (such as vans and tools)
- tax relief on Capital Gains – Business Asset Renovation Relief, Entrepreneur Relief, Business Asset Gift Relief, and Merchant Loan Relief
You can only claim them if all of the following apply:
- the property is offered for rent for at least 210 days a year
- it is rented for more than 105 days a year
- no rental is longer than 31 days
- you charge the going rate for similar properties in the area (‘market value’)
If you personally own the property, your earnings count as earnings for pension purposes.
To help with your taxes, you can use the Capital Allowances Help Sheet and the Furnished Vacation Rentals Help Sheet.
You can claim plant and machinery capital allowances on some items if you rent business property, such as a store, garage, or garage.
calculate your earnings
Calculate the net profit or loss on all rentals of your property (except furnished vacation rentals) as if it were a single business. To do this, you:
- add up all of your rental income
- add up all of your allowable expenses
- remove expenses from income
Calculate profit or loss on furnished vacation rentals separately from any other rental business to ensure you only claim these tax advantages for eligible properties.
make a loss
Find out any loss in your earnings and enter the figure on your self-assessment form.
You can offset your loss against:
- future earnings carried forward to a later year
- earnings from other properties (if any)
You can only offset losses with future gains in the same business.
See also: What is Cash Value Life Insurance? | SmartAsset.com