Q:

What is net rental income?

A:

Quick Answer

Net rental income refers to the amount of income received from tenants, minus the expenses incurred on the ownership of rented property. It is generally included within the umbrella term, net investment income, which comprises income derived from royalties, dividends and interest, as well as passive income and income derived from trade in financial commodities.

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Full Answer

Rental income is considered by the Internal Revenue Service to be taxable as a passive income, although for somebody designated as a real estate professional under Section 469(c)(7) and who can demonstrate an active involvement in the rental agreement, this does not apply.

Net rental income may also be called net operating income, or NOI. Calculations of NOI weigh the potential income from properties at full capacity against the risk factors of vacancy and defaulting tenants. They also take into account associated rental income, such as parking and service charges, and operating expenditures, such as property taxes, insurance, maintenance fees and accounting or legal fees.

NOI calculations do not include factors like income tax, the cost of tenant-specific home improvements or real estate agent commissions, since these are all subject to vary between landlords.

The formula for calculating net rental income is to subtract the costs of tenant vacancy or default, along with all operating expenditures, from the gross potential rental income.

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