One common issue that often arises for both landlords and tenants is whether landlords are allowed to charge tax on the rent they collect. This can be a confusing topic, as tax laws may vary depending on location. In this article, we will talk about what the rules say about if landlords can charge renters more money to cover taxes.
Can landlord charge tax on rent?
Yes, landlords are permitted to charge tax on rent in most jurisdictions. As per income tax laws, any money earned from renting out a property is considered taxable income for the landlord. Landlords are required to pay income taxes on the total rental income received from tenants over the year.
Since taxes are a legitimate business expense, landlords can pass on a portion of the tax liability to tenants through tax charges on monthly rent. However, the specific tax rates and rules regarding rent taxes may vary based on location.
Related: Can A Landlord Sue For Unpaid Rent Without Lease?
What type of taxes can be charged on rent?
The most common types of taxes landlords can charge on rent include goods and services tax (GST) or harmonized sales tax (HST). In some provinces like Ontario, Canada, the HST rate on rental income is 13%. State and local jurisdictions may also impose property taxes on landlords which can be partly passed on to tenants.
As long as the taxes charged are as per the applicable tax rates and the landlord remits them to tax authorities, collecting rent taxes is legal.
How much tax can be charged?
The amount of tax a landlord can pass on to tenants through rent depends on the location's tax rates for rental income. Landlords must charge the standard tax rate, usually matching the GST, HST or prevailing sales tax rate for their province or state.
Charging excessive taxes above the standard rate or pocketing the tax amount instead of paying taxes can land landlords in legal trouble for tax evasion. It is advisable to check with local tax agencies about the accurate rates to charge tenants.
What are the tax deductions landlords get?
While rental income is taxable for landlords, they are eligible for several tax deductions to lower their tax liability. Common deductions include mortgage interest, property taxes, repair and maintenance costs, insurance, property management fees.
Landlords having rental losses for up to three years due to vacancies or expenses can carry forward such losses to offset rental profits in subsequent years. Depreciation of the rental property is another tax write-off available over several years.
What are the tax obligations of landlords?
As businesses, landlords have certain tax compliance obligations too. They must file accurate tax returns reporting all rental income and expenses annually. Common filings include Schedule E of IRS Form 1040 for rental income and expenses.
Form 1099-MISC must also be issued to each tenant who paid $600 or more towards rent and expenses in a year. Non-compliance with filing requirements can attract penalties. Landlords also need to charge and deposit rent taxes on time and file remittance reports with tax bodies.
What penalties may landlords face for not following tax rules?
Severe penalties may apply if landlords do not comply with rental tax laws. Failing to file tax returns or underreporting income could lead to fines and interest charges. Charging excessive rent taxes unlawfully may result in legal lawsuits. In rare cases, willful tax evasion can potentially cause imprisonment of landlords.
Reckless non-compliance may also suspend their rental licenses and professional certifications. It is in the best interests of landlords to abide by all tax regulations to avoid heavy monetary or legal punishments.
What tax reliefs exist for tenants?
While tenants pay the additional tax charged by landlords, some may qualify for tax exemptions or deductions depending on their status. For instance, senior citizens or disabled persons may get an exemption on rent taxes. Tenants in the armed forces renting accommodations can also claim exemptions.
Homeowners renting out spare rooms in their residence may qualify for home-office tax deductions against rental income. Generally, tenants must check their eligibility for any applicable tax reliefs or file for the same while filing returns.
Conclusion
In conclusion, while landlords are legally permitted to charge tax on rent payments within certain thresholds, strict compliance with national, state and local tax laws is mandatory. Both landlords and tenants also need to fulfill all reporting obligations to be in accordance with regulations. With proper understanding and implementation of relevant guidelines, resolving issues like rent taxation need not be difficult.
