Publication 527 - Residential Rental Property
If you own residential property and want to minimize your tax burden, it is important that you
understand how to take advantage of the deductions and tax benefits associated with this type of
income. You also need to know how to correctly report this income. This helps you to pay fewer taxes
and makes you more profitable.
Our professional accountants can help you get the most out of your deductions and get all of your forms
and returns taken care of for you. That gives you more time to focus on what is important. Your rental
business.
Rental Income and Expenses for homes that are Purely for Rental Purposes
You need to report all the income you receive as rent on your tax return. This includes all regular rent
payments as well as:
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advance rent
payment for cancellation of the lease
expenses paid by the tenants
receipt of property as services in lieu of rent
forfeited security deposits
When reporting expenses, there are many items that can be deducted from your taxes. These include:
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Advertising
Cleaning & Maintenance
Commissions
Depreciation
Insurance
Interest
Legal Fees
Local Transportation Expenses – transport expenses for collecting rent or to manage the
property
Management Fees
Mortgage Interest
Points – expenses paid to obtain a mortgage
Rental Payments – apply to rent paid for equipment used or rent on the property being rented
out
Repairs
Tax Return Preparation
Taxes
Travel Expense
Utilities
Loss due to casualty or theft on rental property can be also be deducted.
You will want to keep detailed records of all of your expenses so that your accountant can help you
maximize your deductions.
There are also property types that limit what you can deduct. These are called special situations. These
properties types are condominiums, cooperatives, property converted for rental use, and renting part of
a property.
For these properties, the rule that applies is that only income and expenses directly related to the rental
activity should be reported /deducted.
Finally, the IRS places limits on rental losses. These are covered by the passive activity limit. Any losses
from passive rental activities will be carried forward to the next year and not deducted or offset against
other income in the Income Tax Return unless you actively participate in the management and rental
activity.
Understanding Depreciation
Depreciation is the decrease in the value of assets over time. In light of residential rental property it
applies to the property itself. You can deduct a certain portion of the cost of the property as an expense
on your tax forms. To do this your property must meet the following guidelines:
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You own the property
It generates income
Has a determinable useful life – ( land is not depreciable)
Useful life is more than 1 year
There are many factors to consider when computing depreciation values. You need to decide on a
depreciation method – the method used for properties is almost always the Modified Accelerated Cost
Recovery System (MACRS) or the General Depreciation System (GDS). Under the GDS, the recovery
period is 27.5 years.
You also need to know the cost or value of the property when it was put into service, as well as what the
useful life of the property is. Once these factors have been determined you can claim depreciation of
your property as a deduction.
Part Time Rentals and Renting Part of Your Home.
Many people rent out a home for the time that they aren’t living in it. It is also common to have a rental
unit within your house. There are special rules for dealing with these situations.
If you use a rental property as a personal dwelling unit and rent out a portion of it, then you report the
income and expenses that pertain to only that room, and only for the time it is being rented.
If you own a property that you live in part of the time and rent out the rest of the time, then you
calculate the income and expenses for the time period that the property is rented out. You don’t count
any of the days that the property was used by you or your family in your expense reports. These are
called days of personal use.
Personal use days cover a variety of circumstances. Your property is considered to have been used for
personal use if you donate the use of the property, if it is used by a party with an interest (or coownership) of the property, you rent it out for less than fair rental price. Days used for repair or
maintenance of the property are not considered personal use days.
In addition to these rules a property must be rented out for more than 14 days in a year or more than
10% of personal use days in order to qualify for deductions.
When you are using a residence for both personal use and a rental you calculate your expenses by
dividing them between the rental use and personal use days. It is important to keep very good records if
you are going to use your property this way.
Owning rental properties can be a great way to produce income, but it is important to be familiar with
the rules of reporting both income and expenses for these properties. When you work with our tax
accountants we can advise you on how to track your expenses and income and how to maximize your
deductions and reduce your tax liability, while complying with the law.