How do I pay tax when renting out two houses?

Renting out your houses can be a smart way to earn extra income, but it is important to understand how the taxation works. Things may feel a bit complicated, especially if you rent out more than one property. In this article, we explain the essential rules for reporting rental income from two properties so that you can file your taxes correctly.

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"The standard deduction makes things easier for private individuals who rent out their homes, but it is important to know the limits to make full use of the available deductions."

In Sweden, rental income is generally taxable, regardless of whether you rent out one or two houses. This means you must declare the income you receive and pay tax on it. The tax rate depends on your total income and your municipality. The good news is that you can make several deductions related to the rental, which can reduce the amount you need to pay.

When you rent out a house, it is important to know whether the Tax Agency considers it a private residence  or a business property. This classification affects the rules that apply. If you rent out your primary residence, for example during a period abroad, it is normally considered a private residence.

If you bought a house for the purpose of renting it out, or if the rental is done on a larger scale, the property may instead be classified as a business property. The difference affects how you declare the income and which deductions you are allowed to make.

One of the main advantages of renting out property is the ability to reduce your taxable income using deductions. When renting out two or more homes, it is important to understand how the deductions work and how they apply to each individual property.

For each property, you are entitled to the standard deduction every year. If you rent out a detached house or villa, you may additionally deduct a percentage of the rental income.

These deductions replace actual cost deductions such as interest, property tax or insurance. Renovations or improvements are generally not deductible during the rental period but may become deductible when you eventually sell the property.

When declaring rental income from a private residence, you can use the standard deduction. This gives you a deduction of 40,000 SEK per year and per property, regardless of your actual expenses. If you rent out a detached house or villa, you may also deduct 20 percent of the rental income.

For example, if you receive 100,000 SEK in rent during the year, you can deduct the standard 40,000 SEK plus an additional 20,000 SEK.

Remember that your deductions cannot exceed your rental income. You cannot deduct more than you actually earned, and you cannot claim actual costs such as utilities or renovations beyond the standard deduction and the percentage deduction.

Whether the house is furnished or not does not affect the taxation. Rental income is taxed as capital income. After deductions such as the standard deduction and the 20 percent deduction (for detached houses), the remaining taxable amount is taxed at a flat rate of 30 percent.

There is no split between capital income and earned income in this case. The rules can be tricky, so it is always wise to check the Tax Agency’s website or contact them if you are unsure.

When renting out two houses, it can be challenging to know how to allocate costs such as interest or maintenance between the properties. The main rule is that costs should be allocated proportionally based on the portion of each property that is rented out.

For example, if you rent out all of one house and half of the other, two-thirds of the relevant costs should be allocated to the first property and one-third to the second.

Even though these expenses are not deductible for private residences, accurate records are useful for future situations, such as calculating potential deductions when selling a property.

When renting out two houses, it is important to track income and keep documentation for each property separately. Even if actual costs are not deductible for private homes, this documentation may be important later, for example when calculating improvement deductions upon sale. Keeping separate and clear records for each house makes it easier to avoid mistakes and ensures an accurate tax return.

Read also: How is rental income taxed?