Key Tax Facts For Current And Would-Be HMO Landlords
There are reported to be about half a million “HMOs” (ie houses in multiple occupation) in the UK. A rented property is considered an HMO if at least three tenants live in it and they make up more than one household, with shared toilet, bathroom and/or kitchen facilities.
Written for Expat Network by GoSimpleTax
Typically, HMOs provide a home for a broad church of people, ranging from students, unemployed people and those on low-incomes to recent graduates, young professionals, non-professionals and people working away from home during the week. HMOs offer accommodation that is normally cheaper than other private rental options, which is a key reason for their continued popularity.
If you’re interested in becoming an HMO landlord, this guide provides key facts about how your income would be taxed. Maybe you’re already an HMO landlord and want to make sure that you’re paying the right amount of tax? Before we move onto tax, let’s briefly look at your key legal responsibilities as an HMO landlord.
HMO landlord legal responsibilities
- If five or more people live in an HMO, it’s known as a “large HMO” and must have a licence from the local council (see government website GOV.uk for more on HMO licenses).
- Some local councils require smaller HMOs to be licensed, so, be sure to check.
- The council must carry out a risk assessment on your HMO within five years of receiving your licence application. If any unacceptable risks are evident, you must sort them out.
- Tenants can contact the local council to report hazards in your HMO and the council can take action against you to ensure that you sort out any problems.
- You must inform the council if you or your tenant(s) plan to make changes to an HMO.
- You must also tell the council if your tenants’ circumstances change (eg they have a baby or adopt a child).
Need to know! There are different rules for HMOs in Scotland and HMOs in Northern Ireland.
Is HMO rental income taxable?
Rent you receive from your HMO tenants is taxable income once it goes over certain thresholds. Before you’re taxed, you can deduct expenses you pay to rent out your HMO (explained in more detail further on), with any tax allowances also taken into consideration. You pay tax on the profit you make from your HMO, with any other taxable income you receive also taxed as appropriate.
If you rent out more than one HMO or other rental property, the taxable profits from all are added together, as well as all costs and allowable expenses, before HMRC (the UK tax authority) tells you how much tax you owe. If applicable, any income you earn from overseas properties must be reported separately to HMRC.
Register as an HMO landlord for Self Assessment
You don’t pay any tax on the first £1,000 you earn from your rental income. This is your “property allowance”. If you earn £1,000-£2,500 from annual rental property income, you need to contact HMRC to find out how to report it.
If you earn between £2,500 and £9,999 a year from rental income after your “allowable expenses” have been deducted (or £10,000 before they’re deducted), you must report your HMO rental income via Self Assessment (the system HMRC uses to collect Income Tax from landlords and others).
If you don’t already file a Self Assessment tax return, you must register by 5 October following the tax year in which you earned rental income. The UK tax year runs from 6 April until the following 5 April.
- Visit government website GOV.uk to register online for Self Assessment. If you’ve filed online before, just sign into your existing Self Assessment tax account.
How much tax will you pay on HMO rental income?
The amount of tax you pay is determined by the tax expenses and allowances you claim and how much HMO rental income you receive, as well as how much taxable income you receive from all other taxable sources (eg wages from employment or self-employment, share dividends, etc).
You’re taxed based on the Income Tax band into which you fall once your total taxable income has been calculated. The Income Tax band tax rates for the 2023/24 tax year are:
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,570||0%|
|Basic rate||£12,571 to £50,270||20%|
|Higher rate||£50,271 to £125,140||40%|
|Additional rate||More than £125,140||45%|
No tax is payable until your income goes over the Personal Allowance threshold (£12,570), but it decreases by £1 for every £2 of net income you receive over £100,000 and if your net income is £125,140 or more – you don’t get the Personal Allowance. Income Tax bands and rates are different in Scotland.
No National Insurance is payable on your rental income unless being a landlord is your main job, you rent out multiple properties and you buy new properties to rent out (in other words, you run a professional property rental business).
If you own the HMO rental property with others, your tax bill will be determined by your share. If it’s 50%, you’ll be taxed on half of the taxable rental income from the property. If you own a third, you’ll be taxed on 33.33% of the taxable rental income, etc.
What HMO tax expenses can you claim?
You can deduct many allowable expenses from your HMO rental income if generated wholly and exclusively from renting out your property. If you use something for personal and rental purposes (eg your mobile phone), you can claim part expenses, as long as you reliably work out how much of the total cost resulted from your activity as an HMO landlord.
Landlords who own HMOs often pay water rates, Council Tax, and sometimes gas and electricity for the whole property. These can be claimed as an allowable expense, which reduces your taxable profit and tax bill. If your HMO tenants themselves pay these or pay you for them, obviously, you cannot claim them as an allowable expense.
Allowable expenses for HMO landlords can also include:
- property maintenance and repair cost (eg replacing roof tiles or a door)
- ground rents and service charges (if applicable)
- redecorating between tenancies
- building, contents and public liability insurance
- gardening and cleaning costs
- agent fees/management fees
- legal fees for lets of a year or less (eg for legal advice about pursuing unpaid rent, etc)
- accountancy/bookkeeping fees
- direct costs (eg phone calls, stationery and advertising for new tenants, etc)
- vehicle/fuel costs (only the proportion used for your rental business)
- costs for disposing of old items of furniture or electrical appliances, etc.
Need to know! You can’t claim mortgage capital repayments as an allowable expense. Before 2017 you could deduct mortgage interest and other finance costs (eg mortgage arrangement fees) from your HMO rental income to reduce your Income Tax liability, but now you receive a 20% tax credit.
Replacing furnishings and equipment in HMOs
If you rent out a furnished or part-furnished HMO, replacing furnishings or equipment cannot be claimed as an allowable expense. But, you can claim Replacement Domestic Items relief for replacing a sofa, bed, carpets, curtains, white goods, crockery, cutlery, etc. The quality should be similar, because you can only claim the value of like-for-like replacements.
Need to know! Building an extension, converting a loft and making other structural improvements cannot be claimed as an allowable expense, because you’re increasing the property’s value (ie making a “capital improvement”). However, if you later sell the property, you may be able to claim capital expenses against Capital Gains Tax.
How to report your HMO rental income
You report your HMO rental income by filling out and filing a SA105 tax form, summarising your total HMO rental income and any allowable expenses you want to claim. You must also complete and file the main Self Assessment tax return, the SA100.
That will give HMRC the information it needs to calculate your tax bill.
The Self Assessment tax return online filing deadline is midnight on 31 January (it’s the same every year). A £100 fine is payable immediately if you miss it. If HMRC asks you to file a Self Assessment tax return you must give details of your rental income and expenses for the tax year – even if you believe there is no tax to pay.
The deadlines for paying your tax bill are:
31 January for any tax you owe for the previous tax year (known as a “balancing payment”) and your first “payment on account” (ie advance payments towards your tax bill)
31 July for your second payment on account to pay the balance for any tax you owe. To enable you to better budget for paying your pay bill, you can make weekly or monthly payments towards your tax bill.
Find out more
- Visit government website GOV.uk for official guidance on your responsibilities as an HMO landlord and your tax liability as an HMO landlord.
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How does the IRS know if I have rental income? ›
Ways the IRS can find out about rental income include routing tax audits, real estate paperwork and public records, and information from a whistleblower. Investors who don't report rental income may be subject to accuracy-related penalties, civil fraud penalties, and possible criminal charges.How is rental income taxed in US? ›
Rental income is taxed as ordinary income, but you may be able to lower your tax burden by claiming certain deductions on your tax return. You can deduct expenses related to owning and maintaining a rental property, such as mortgage interest, insurance, and utilities.Is rental income an earned income? ›
In most cases, income received from a rental property is treated as passive income for tax purposes. That means an investor generally doesn't need to withhold or pay payroll taxes because most investors own rental property in addition to having a job.Is roommate rent taxable income? ›
Lots of people are trying to earn a few extra bucks by renting out a room in their home. As far as taxes go, this comes with bad news and good news. The bad news is that the rent you receive is taxable income that you must report to the IRS.How do you calculate rental income? ›
Lease Agreements or Form 1007 or Form 1025: When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as “Monthly Market Rent” on the Form 1007.)What are red flags for the IRS? ›
Some red flags for an audit are round numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits. The best defense is proper documentation and receipts, tax experts say.How is rental income taxed for non resident in USA? ›
A non-resident who is receiving rental income from US real property is generally subject to a 30% withholding tax applied on the gross amount of each rental payment.What income is not taxable? ›
Nontaxable income won't be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer.Can you deduct expenses on a rental property that is not rented? ›
A good rule of thumb to follow is: if the home is not occupied, you can deduct it. This means even if you have a relative staying at the place (rent-free), you cannot deduct that time. You can only deduct expenses from the rental property for any period of time when the home is 100% vacant.Is rental income earned income or capital gains? ›
Any profits made on the sale of a rental property will be taxed as long-term capital gains. Therefore, the amount of money you will pay will vary depending on how much profits you made. This tax is only applicable if you have owned the property for over a year, which is typical for most rental properties.
How do I avoid passive income tax? ›
By keeping assets in tax-deferred accounts like IRAs and 401(k) plans, you won't have to pay tax on your income and gains until you withdraw the money from the account. In the case of a Roth IRA, you may never have to pay tax on your distributions at all.Is Airbnb considered earned income? ›
Wouldn't it be great if your home was working while you were on vacation? Well, that's essentially what happens when you rent out your apartment on Airbnb and other similar services. Rental income is not considered to be earned income subject to self-employment tax and you are not considered self-employed.Can I deduct mortgage from rental income? ›
If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.What is the difference between shared living expenses and rental income? ›
Rental income is cash received from a tenant, or work done by a tenant in lieu of paying rent. Shared expenses are a tenant's share of expenses – such as repairs, insurance, mortgage, interest, and property taxes. Two common ways to calculate shared expenses are by the number of rooms or the square footage of the home.Is rental income passive income? ›
The IRS considers a rental activity to be passive if real estate is used by tenants and rental income (or expected rental income) is received mainly for the use of the property. In other words, owning a rental property and collecting rental income is considered passive and not active in most cases.How do you manually calculate rental income? ›
To calculate, first multiply the monthly rent amount by the number of months in the year to determine the income from rent; then, divide the income from rent by the appreciated home value. For example, if the monthly rent is $900, the total income from rent for the year would equal $10,800.How do you calculate monthly income on a rental property? ›
Divide the gross annual income by 12 to get their monthly income figure: $86,000 ÷ 12 = $7,166.68 is their monthly income. Now multiply your rent by 3 to see if that total is less than the tenant's total monthly income: $3,000 x 3 = $9,000 per month.What is a good capitalization rate for rental property? ›
A “good” cap rate varies depending on the investor and the property. Generally, the higher the cap rate, the higher the risk and return. Market analysts say an ideal cap rate is between five and 10 percent; the exact number will depend on the property type and location.What triggers a IRS audit? ›
What triggers an IRS audit? A lot of audit notices the IRS sends are automatically triggered if, for instance, your W-2 income tax form indicates you earned more than what you reported on your return, said Erin Collins, National Taxpayer Advocate at the Taxpayer Advocate Service division of the IRS.Who gets audited by IRS the most? ›
Black people with low income have nearly a 3 percent higher audit rate than Non-Black people with low income. If you're a single Black man with dependents who claims the Earned Income Tax Credit (EITC), you have a 7.73% chance of being audited by the IRS in any given year.
What not to say in an IRS audit? ›
Do not lie or make misleading statements: The IRS may ask questions they already know the answers to in order to see how much they can trust you. It is best to be completely honest, but do not ramble and say anything more than is required.Can a foreigner be a landlord in US? ›
In the United States, foreigners can own property in various ways. The first is direct ownership, which is the easiest way for foreigners. However, directly owning a US property as a foreigner will certainly expose you to sales taxes, estate taxes, and, in case you want to rent the property, high rental income taxes.How is foreign rental income treated for taxes? ›
For the most part, foreign rental property is treated the same as a domestic rental property. This means that as an expat property owner, you will generally report your foreign property rental income and expenses just like you would with a US rental property.Can a foreigner rent a house in USA? ›
Renting a House or Apartment
Whether you are a foreigner or a local, the how-to for apartment and house renting in the US is very similar. The process and contracts are usually the same and you cannot be denied tenancy because of your country of origin.
In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.How can I make tax-free income? ›
- There are still ways to earn income that is free from federal income tax. ...
- Gifts and Inheritances. ...
- Tax-Free Home Sale Gains. ...
- Life Insurance Proceeds. ...
- Economic Impact Payments (EIPs) ...
- Qualified Roth IRA Withdrawals. ...
- Qualified Section 529 Withdrawals.
Earned income also includes net earnings from self-employment. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits.What happens if my expenses are more than my rental income? ›
When your expenses from a rental property exceed your rental income, your property produces a net operating loss. This situation often occurs when you have a new mortgage, as mortgage interest is a deductible expense.How does the IRS treat renting a property to a family member? ›
Rent at Fair Market Value
If you rent below fair market value, then every day the relative rents the property is considered the same as a day when the taxpayer personally used the property. As we have seen, property cannot be considered rental property if the owner uses it personally for more than 14 days.
Definition of Rent Revenue
Rent Revenue is the title of an income statement account which (under the accrual basis of accounting) indicates the amount of rent that has been earned during the period of time indicated in the heading of the income statement. The account Rent Revenue is also known as Rental Income.
What are the 3 types of income? ›
- Income #1: Earned Income. This is the primary source of income. ...
- Income #2: Investment Income. This is the income that is generated by selling investments that were made earlier. ...
- Income #3: Passive Income. Passive income is another important source of income.
Since passive income is money earned that is not related to a work activity or your ability to perform it, most forms will not be taken into account by the SSA when they are determining your eligibility or the amount of monthly benefit you are entitled to receive.Why is passive income never taxed? ›
Passive income, from rental real estate, is not subject to high effective tax rates. Income from rental real estate is sheltered by depreciation and amortization and results in a much lower effective tax rate. For example, let's say you own a rental property that nets $10,000 before depreciation and amortization.How does IRS treat Airbnb income? ›
Pay self-employment taxes. When you rent out your home, make bookings and provide amenities or services, like coffee or breakfast, the IRS may treat you as being self-employed in the vacation rental business. If you are self-employed, you have to pay self-employment taxes, as well as income taxes.Can you write off furniture for Airbnb? ›
Is Airbnb furniture tax deductible? Yes, furniture—and any costs to repair existing furniture—can be a deductible expense come tax time. The same applies to amenities and appliances you purchase for your guests, such as a toaster, a TV, bed sheets, and towels.Does Airbnb report rental income to IRS? ›
Regardless of whether you receive a Form 1099-K, the rental income you earned from Airbnb is reportable on Form 1040, unless the non-taxable rental exception applies (discussed below). It is important to note that the gross amount reported to you will exceed the actual amount paid-out by Airbnb.Can you write off insurance on a rental property? ›
Here's the skinny: You can only deduct homeowner's insurance premiums paid on rental properties. Homeowner's insurance is never tax deductible your main home.Can you write off mortgage and insurance for a rental? ›
Can you deduct mortgage insurance premiums on rental property? In general, you can deduct mortgage insurance premiums in the year paid. However, if you prepay the premiums for more than one year in advance, for each year of coverage you can deduct only the part of the premium payment that will apply to that year.Is the mortgage interest 100% tax deductible? ›
Is all mortgage interest deductible? Not all mortgage interest can be subtracted from your taxable income. Only the interest you pay on your primary residence or second home can be deducted if the loans were used to purchase, build or improve your property, or used for a business-related investment.What are the 4 types of income from rental? ›
With long-term rentals, there are four sources of income: rents, capital gains, tax write-offs, and debt paydown.
Is it better to rent or own financially? ›
Buying a house gives you ownership, privacy and home equity, but the expensive repairs, taxes, interest and insurance can really get you. Renting a home or apartment is lower maintenance and gives you more flexibility to move. But you may have to deal with rent increases, loud neighbors or a grumpy landlord.What is an example of rental income? ›
Example: You sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. You must include $10,000 in your income in the first year.How does the IRS define passive income? ›
Material and Active Participation
Passive activities include trade or business activities in which you don't materially participate. You materially participate in an activity if you're involved in the operation of the activity on a regular, continuous, and substantial basis.
If you don't report rental income to the IRS, you'll be committing tax fraud. Unfortunately, there is no way to sugarcoat this. If you are hiding income from the IRS, including rental income, you'll be committing tax fraud.Will the IRS catch unreported income? ›
Unreported income: The IRS will catch this through their matching process if you fail to report income. It is required that third parties report taxpayer income to the IRS, such as employers, banks, and brokerage firms.Does Airbnb report income to IRS? ›
The rule is simple: you don't have to report rental income if you stay within the 14-day rule. However, because of reporting laws, companies like Airbnb, HomeAway and VRBO may report to the IRS all income you receive from short-term rentals, even if you rent for less than two weeks.How far back can the IRS audit rental property? ›
The basic rule for the IRS' ability to look back into the past and conduct a tax audit is that the agency has three years from your filing date to audit your tax filing for that year. However, taxpayers who fail to include all sources of their income may face a longer time period.What can I do with my rental income to avoid taxes? ›
Renting your house or vacation home for less than 15 days keeps you from having to pay taxes on a single cent of income you received from your short-term rental, but rent your home for just 15 days, or more, and you'll pay income tax on the whole amount, including the first 14 days.Does Zelle report to IRS? ›
Long story short: Zelle's setup, which uses direct bank-to-bank transactions, is not subject to the IRS's 1099-K reporting rules. Other peer-to-peer payment apps are considered “third-party settlement organizations” and are bound by stricter tax rules.Can IRS see your bank account? ›
The Short Answer: Yes. Share: The IRS probably already knows about many of your financial accounts, and the IRS can get information on how much is there. But, in reality, the IRS rarely digs deeper into your bank and financial accounts unless you're being audited or the IRS is collecting back taxes from you.
What triggers an IRS investigation? ›
Criminal Investigations can be initiated from information obtained from within the IRS when a revenue agent (auditor), revenue officer (collection) or investigative analyst detects possible fraud.Does rental income affect Social Security? ›
Rental income you receive from real estate does not count for Social Security purposes unless: You receive rental income in the course of your trade or business as a real estate dealer (see 1214-1215);Can you write off home improvements? ›
When you make a home improvement, such as installing central air conditioning or replacing the roof, you can't deduct the cost in the year you spend the money. But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.What if a taxpayer dies during the tax year? ›
Death of a Taxpayer
If a taxpayer died before filing a return for 2021, the taxpayer's spouse or personal representative may have to file and sign a return for that taxpayer. A personal representative can be an executor, administrator, or anyone who is in charge of the deceased taxpayer's property.
One of the common misunderstandings around household employment is whether you should consider them an independent contractor and provide them a Form 1099-C during tax time. The short answer is no, you can't give your household employee a 1099.How does IRS see I paid my Airbnb taxes? ›
Airbnb Will Report to the IRS
Whether Airbnb sends you a 1099 form or not may depend on how much you make during the year. If you have over 200 reservations and make over $20,000 per year, Airbnb will send you an IRS Form 1099-K. If you operate multiple Airbnb accounts, you may receive more than one tax form.