By | June 4, 2025
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How To Avoid Paying Tax On Rental Income

Avoiding taxes illegally on rental income is tax evasion — and can lead to fines, penalties, or prosecution. However, there are many legal ways to reduce or avoid paying tax on rental income by using allowable deductions, structuring ownership wisely, and leveraging tax laws.

Here’s how you can legally reduce or eliminate taxes on rental income, depending on your location:

🇬🇧 In the United Kingdom

1. Claim Allowable Expenses

You’re taxed only on profits, not total rent. Deduct:

  • Mortgage interest (note: only 20% tax credit since 2020, not full deduction)
  • Letting agent fees
  • Maintenance and repairs (not improvements)
  • Insurance
  • Council tax, utilities (if you pay them)
  • Ground rent and service charges

2. Use the £1,000 Property Allowance

If your rental income is under £1,000/year, it’s tax-free.
If over, you can either:

  • Deduct the £1,000 allowance instead of actual expenses

3. Rent a Room Scheme

If you rent a room in your main home, you can earn up to £7,500/year tax-free.

4. Hold Property in a Company

  • Corporate ownership allows mortgage interest to be fully deductible.
  • Corporation tax (currently 25%) is often lower than higher-rate income tax.
  • Good for higher earners or landlords with multiple properties.

5. Use Capital Allowances (for Furnished Holiday Lets)

  • Holiday lets (meeting specific conditions) allow:
    • Full mortgage interest relief
    • Capital allowances on furniture
    • Pension contributions
    • Possible CGT reliefs (e.g. Business Asset Disposal Relief)

🇺🇸 In the United States

1. Depreciation

  • You can depreciate the building (not land) over 27.5 years.
  • Often creates a “paper loss” even when you’re cash-flow positive.

2. Deduct All Operating Expenses

Including:

  • Property management fees
  • Maintenance and repairs
  • Mortgage interest
  • Property taxes
  • Insurance
  • Utilities
  • Travel related to property management

3. Use the “Real Estate Professional” Status

If you materially participate and work >750 hours/year in real estate, rental losses can offset other income, including your salary.

4. Short-Term Rental Loophole (STRs)

If you rent for less than 7 days per stay and materially participate, you may qualify to deduct rental losses against regular income — even without being a real estate professional.

5. 1031 Exchange

  • Allows you to defer capital gains tax by rolling sale proceeds into a new investment property.
  • Must follow strict timing and property rules.

General Strategies (Anywhere)

  • Keep Accurate Records: You can only deduct what you can prove.
  • Split Income With Spouse: In some cases, transferring ownership (fully or partly) to a lower-income spouse reduces tax.
  • Use a Trust or LLP: More advanced setups, often for high earners or estate planning.
  • Tax-Deferred Retirement Accounts (in the US): In some cases, you can own real estate inside a Self-Directed IRA or Solo 401(k) (very specific rules apply).