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Is Rental Income Taxable in Texas

A wise real estate investor is always looking for new places to invest in, more so those with a rising population, such as Texas. Its low unemployment rates and highly educated millennial workforce guarantee a good long-term cash flow and return on your initial investment.

But while the returns are promising, you can’t help but wonder, ‘is rental income taxable in Texas?’ Taxes are a worrisome factor for an investor as they can eat into your profits, making it hard to repay your loans and meet other financial obligations.

Below, you’re going to learn all about taxes on rental income to help guide your investment decisions. Read on to learn why Texas is a good place to buy a rental property and what to declare when filing taxes on rental income.

Written by Victor Steffen
  / March 20, 2023

Victor Steffen is a seasoned Realtor and real estate investor in central Texas with years of experience and over 130 deals closed in the last 12 months.

What Makes Texas a Good Place to Invest in Rental Properties?

Every investor will look at multiple factors before investing in the local real estate market. They will want a place that guarantees a steady and high ROI without having to worry about paying high rental income tax.

This article will focus on four key points to help you learn why Texas is a great investment area.

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1. Rising Population Leading to an Increased Demand for Rental Properties

A wise investor will want to focus on a state with rising population numbers. Why? The more people a state has, the higher the demand for rental properties. Texas continues to record a steady population growth, which translates to increased demand for rental properties.

Statistics from the recent census indicate that the Lone Star State comes a close second, after California, in terms of population growth. And, as you continue researching the Texas rental income tax rates, you should note that more and more people are leaving California for Texas.

Some of the reasons given by those who are moving include:

  • Non-landlord-friendly taxes in California
  • Lack of land for construction
  • High cost of living in California
  • The major tax benefits of investing in Austin, Texas, real estate
  • Massive job competition
  • High housing prices

Relocating to Texas can help you reconcile all these issues. Plus, the Texas: Sales Tax Handbook will surely help you learn what to expect in terms of taxes. It will come in handy when you finally make your move to the Lone Star State.

Are Leases and Rentals subject to sales tax?

Although Texas’ sales tax typically applies to all major transactions, certain items will typically receive special treatment. Below is a table that will help you answer the questions, ‘what income is not taxable in Texas, and how much rental income is exempt from tax?

It captures the taxability of various leases and rentals in the state, e.g., tangible media property and motor vehicles.

Tangible Media Property Taxable All income arising from the sale of tangible media property is subject to Texas’ sales tax.
Motor Vehicles Exempt All motor vehicle leases lasting more than six months are exempted from the use and general sales tax. However, they are subject to any other applicable motor vehicle sales and use tax. Vehicles leased for less than one month are subject to gross rental receipts tax charged at a rate of 10%. For rentals lasting longer than a month, owners will need to pay a rate of 6.25%.

2. Texas Has a Low Unemployment Rate Thanks to Its Booming Economy

For investors looking for long-term capital gains, there is no better place to invest than Texas. It boasts of an outstanding job market that’s facilitated by its extraordinarily successful economy.

The favorable economic conditions are due to several factors:

  • The oil and gas boom which Texas is known for worldwide
  • Several Fortune 500 companies have shifted their headquarters here
  • The presence of leading colleges, universities, and manufacturing companies

How do the above factors make Texas a good real estate investment place?

When combined, they help in creating a stable environment for blue-collar jobs. These are the jobs that act as the foundation and backbone of the local economy. Additionally, the existence of a thriving job environment creates a demand for rental properties.

Employees with stable jobs will likely stay longer, leading to a steady rental income. As your tenant turnover reduces, you have to wonder, ‘do we have to pay tax on rental income?’ The short answer is Yes, but the tax benefits of investing in Austin, Texas, real estate are several.

For example, an Austin rental home straddles the line between an investment and a business. What this means is that you’ll normally receive various tax advantages and write-offs on the property.

3. The Lone Star State is a Landlord Friendly Place

Are you wondering whether there are any major benefits to buying real estate in Texas? You should note that Texas is a landlord-friendly state. The state believes the landlord should retain certain rights over the property, and for good measure – you own the property!

For example, you don’t have to worry about engaging in unending court battles with your tenants, as the laws will always favor you over the tenant. If a tenant is found to have acted negligently, the laws will ensure they are removed quickly and without a fuss.

4. Real Estate Investors Don’t Pay Texas Rental Income Texas

Lastly, another aspect that makes it worthwhile to invest in Texas is that you won’t have to pay the state income tax. As such, buying rental property in the state can help save you a significant amount of money, which will go a long way toward increasing your bottom line.

However, you’ll still need to pay Uncle Sam when it comes time to pay Federal Taxes. As a result, you need to learn the numerous techniques you can use to avoid paying more in your Federal Taxes.

How Do I Avoid Paying Taxes on Rental Income?

Every investor is interested in getting a big tax write-off after buying a rental property. It explains the clamor to understand what you can deduct from taxes on rental income. What you may not know is that the deductions will favor you when buying an investment property.

You can use the following methods to reduce your tax bill when buying a rental property:

  • Deduct Direct Costs: You can deduct the costs of running and marketing your rentals. These will include professional fees, mortgage interest, maintenance repairs, utilities, and insurance taxes.
  • Trade-In, Trade-Up: The Local tax codes allow you to trade one property for another without being required to pay a capital gains tax. However, this only applies to the state tax, as you may have to pay the Federal Tax.

Taxes on Rental Income: What to Declare

The Texas rental income tax declared when filing your taxes will depend on the accounting method used. Most landlords prefer to use the “cash basis method,” where they report income as it comes in and expenses as they go out.

However, others prefer the “accrual method,” which involves counting income after you have earned it and not after receiving it. The cash basis method will probably work best for a simple investor running a rental property.

When reporting your annual earnings, you can report the following as income rent:

  • Advance rent
  • Security deposit provided by the client
  • In-kind payment
  • Payment made by a tenant to get out of a lease
  • If the tenant pays for building expenses not included in the lease agreement

How to Report Taxes on Texas Rental Income

When the time comes to file your Texas rental income, we recommend that you fill in Form 1040 and ensure that you affix Schedule E: Supplemental Income and Loss. For the latter, you’ll need to list out the following:

  • The total annual income
  • Expenses and depreciation incurred by each property. In the expenses, make sure to include the following:
    • State taxes, if applicable
    • Advertising
    • Maintenance and repairs
    • Insurance
    • Auto and travel expenses

If the rental properties have depreciated, you’ll need to fill in Form 4562.

Maintaining a record of your property management is important to ensure you provide the IRS with the correct details. Some of the records you’ll need include deductible expenses, rent checks, receipts, and financial statements.

Failure to provide this type of documentation means you may not get to deduct as many deductibles as you would like. Even worse, the IRS may choose to hit you with additional penalties or taxes.

The major tax benefits offered by the state mean you can expect to receive a good return on your investment and a steady tenant turnover. Use the tips in this guide to learn what you can deduct from taxes on rental income when filing your taxes.

Is Rental Income Taxable in Texas – Conclusion

Texas typically charges a sales tax on the lease and sale of tangible media property and motor vehicles unless there’s a specific exemption to it. But while this is the case, its low unemployment rates and rising population make it a good investment decision.

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Frequently asked questions

How Do I Avoid Paying Tax on Rental Income?

There are two major ways to avoid paying tax on rental income: by deducting direct costs and by trading in your existing property before trading up. Both tactics will allow you to pay a considerably low amount in taxes than you would have if you didn’t use them.

Do we have to pay tax on rental income?

You’ll have to pay tax on rental income, although you stand to enjoy various benefits in the form of tax write-offs and other tax advantages. Remember, the property is an investment and a business simultaneously, which is why the Texas rental income tax applies.

How much rental income is exempt from tax?

Texas has exempted leases lasting more than six months from its use and general sales tax. However, those lasting less than thirty days will attract a tax rate of 10%, and those lasting more than thirty days but less than 180 days will attract a rate of 6.25%.

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