Understanding Rental Income Taxes: Categorization and Taxability

If you own rental real estate, you must be aware of tax responsibilities on the federal, state, and (in some cases) local levels. With this knowledge, you can ensure that all rental income is reported on the applicable tax returns.

Types of Rental Income

As an investor, correctly categorizing your rental income is critical for both tax and financial planning. In general terms, rental income can be classified into two categories:

• Active income: This stems from hands-on activities like short-term rentals or managing properties. Examples include daily rentals or properties where you’re significantly involved in the operations.
• Passive income: This is generated from long-term leases where you aren’t actively involved in the day-to-day operations.

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