If you own rental real estate, you should know how it impacts your personal tax return. Rental income must be reported on your tax return, and generally, associated expenses can be deducted from your rental income. Reviewing answers to the following common questions regarding rental property may help you understand the tax implications of rental property ownership:
- What is considered rental income?
- What deductions can I take as an owner of rental property?
- What are some things I should know about rental property?
- Contact your neighborhood Jackson Hewitt office for more information or assistance. Use the Office Locator feature available on this Web site or call 1-800-234-1040 to find the Jackson Hewitt location most convenient to you.
What is considered rental income?
Rental income is any income you receive for the use or occupancy of property you own. Some examples are:
- Payment to cancel a lease
- Advance rent
- Expenses paid by the tenant
- Any security deposit kept because a tenant did not fulfill their part of the rental agreement
- Rental income does not include:
- A security deposit you are holding with the intent of returning it to the tenant at the end of the lease
- Income received from renting your home for fewer than 15 days per year
What deductions can I take as an owner of rental property?
Deductible expenses for rental property are the ordinary and necessary expenses to manage, conserve, and maintain your property. Deductible expenses include:
- Advertising in the newspaper for tenants and cost of signs
- Cleaning supplies
- Real estate taxes
- Mortgage and other interest paid for the rental property
- Cost of insurance-hazard, flood, fire, or liability
- Payments for service such as lawn care, pest control, and trash collection
- Payments for maintenance of the property
- Professional fees for tax advice and tax return preparation fees for the part of the tax return dealing with rental property
- Cost of new locks and keys
- Commissions paid for finding tenants
- Cost of necessary transportation to and from the rental property for the purpose of maintenance, management, rent collection, picking up supplies, or checking the property (if you use your personal vehicle, either keep track of actual expenses and miles traveled or just the miles traveled)
- Cost of repairs and maintenance (not improvements) to keep your property in good condition (this includes items such as repainting and fixing floors and windows)
- Cost of renting equipment used for the rental property
- Depreciation of the property (not including the land)
- Depreciation of appliances, furnishings, and improvements
- Any long distance calls associated with your rental property
- The court costs for evicting a tenant
- Legal fees pertaining to the rental property or tenants
- Expenses incurred when the property is not rented as long as you are actively trying to rent the property (even if you are renting it for the first time)
You cannot deduct:
- Rental income lost due to vacancy
- The cost of improvements which increase the value and/or extend the life of the property or modify it for a new use (includes such things as a room addition, new carpet, new appliances, fencing, or a new roof - these items can generally be depreciated)
What are some things I should know about rental property?
If you rent only part of your property, certain expenses must be divided between the part used as rental property and the part used for personal purposes.
If you do not rent your property for profit, you can deduct your rental expenses only up to the amount of your rental income.
When rental property is sold, the resulting gain or loss is treated as ordinary or capital, depending on the circumstances.
The rental of personal property such as equipment or vehicles is reported as business income. You are in the business of renting personal property if the primary purpose for renting the property is income or profit and you are involved in the activity on a continuous and regular basis. If your rental of personal property is not a business, other rules for reporting will apply.
Deductible losses from residential rental properties are subject to certain limitations. If you are considered a real estate professional, special rules apply for the reporting of income and losses. For more information, contact your neighborhood Jackson Hewitt Tax Service office.