Owning a rental property has many tax implications. Here’s what qualifies as rental income, along with a list of deductions you can take.
Taxes on Rental Income and Deductible Expenses
What is considered rental income?
If you earn money from renting out property you own – whether you’re renting it for occupancy or just general use – you must report that income on your tax return. Generally, associated expenses can be deducted from your rental income.
Examples of rental income can include:
- Rent (paid on time or in advance)
- Payment to break or cancel a lease
- Expenses paid by the renter
- Any part of a security deposit you keep
What deductions can you take?
Deductible expenses are costs related to the management and maintenance of your property. These can include:
- Advertising and signage
- Cleaning supplies
- Real estate taxes
- Mortgage and other interest paid for the property
- Insurance – hazard, flood, fire, or liability
- Maintenance services like lawn care, pest control, and sanitation
- Accounting or financial advice related to your property
- New locks and keys
- Commissions paid
- Necessary transportation
- Depreciation of the property (not including land)
- Long-distance calls associated with the property
- Legal fees
You cannot deduct income lost due to vacancy or the cost of improvements that bring the property back to the original value.
Important facts about owning rental property
If you rent part of your property, you need to divide the related expenses according to how much of the property is rented and how much is personal.
If you don’t rent your property for profit, you can deduct rental expenses up to the amount of your rental income.
Any gain or loss from the sale of your property should be treated as ordinary or capital, depending on the situation.
Renting personal property, like equipment or vehicles, should be reported as business income. You are in the business of renting personal property if the main purpose for renting out the property is to gain income or profit and if you are regularly involved in this type of transaction. If you rent your property for purposes other than a profit, other reporting rules apply.
Deductible losses from residential rental properties can be subject to certain limitations. If you are a real estate professional, special rules apply for reporting income and claiming losses.
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