Rental Property Overview
Renting property includes renting your second home, vacation home, a
room in your house, as well as properties used solely for rental purposes.
When you rent property you are afforded numerous deductions and tax
advantages that allow you to protect your income and lower
your tax burden. 


Renting Property is a Passive Activity
Before discussing rental income and rental losses relating to rental
property you need to understand that rental activities are considered
"passive" activities.  The passive activity label means that you
may not deduct a rental loss against nonpassive income such as
your salary from your job or investment income (stocks and bonds, for
example).  There are two exceptions though!

Learn about passive activities here


Rental Activities
So, what is a "rental activity" you ask?  Rental activities include all
activities in which a customer pays for the use of tangible property
(real estate or personal property).  We are only concerned with the
rental of real estate.  Renting property is a passive activity but there
are activities that are not treated as "rentals".   These are
exceptions  for hotels and similar businesses. 

Learn about these "non rental" activities here


Tax Advantages
There are many tax advantages in real estate investment in rental
properties.  The typical standard deductions for rental properties
include:

Property taxes Home mortgage interest Depreciation

When you rent a property, almost everything is tax deductible.  These
deductions include operating expenses, such as repairs.

Be sure you understand the difference between repairs and
improvements because you can deduct repair costs against
rental income while with improvements, you may not. 

Learn about the differences between repairs and improvements here!

Rental Income vs. Rental Losses
You must pay taxes to the IRS on your rental income.  The good
news is that rental income may be offset by rental losses, or
rental expenses. 

The tax deductible losses, or expenses, reduce the amount of
rental income that is taxed on your tax return.    You will generally
report such taxable income  and expenses on Form 1040, Schedule E. 


Rental Property Scenarios
 

Tax Return Preparation
The IRS allows you to deduct, as a rental expense, the part of tax
return preparation fees you paid to prepare Schedule E (income
or loss from rentals), Part 1.  For example, on your 2011 Schedule E
you can deduct fees paid in 2011 to prepare Part 1 of your 2010
Schedule E.  You can also deduct, as a rental expense, any expense
you paid to resolve a tax underpayment related to your rental activities.

You can also deduct, as a rental expense, any expense you paid to resolve
a tax underpayment related to your rental activities. 


 

The most important thing you can do is SAVE ALL
YOUR RECEIPTS!!  It's important for you to keep every receipt and
note every expense and piece of income in some sort of ledger.





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