Rental Property Tax Deductions

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 of Rental Property

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

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 for Rental Property

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 2013 Schedule E you can deduct fees paid in 2013 to prepare Part 1 of your 2012 Schedule E. Note you are paying the 2012 tax preparation fees in 2013 since that is the year the fee was paid. 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.