Tax Deduction for Rental Properties

Rental property is one of the fastest growing forms of real estate today. With this increase in popularity there are also more questions than ever about how to best go about renting a property. Fortunately, it is not nearly as complicated or overwhelming as many people believe.

rental property

When renting a residential rental property, meaning a residence that you will use solely for vacation purposes, there are a few things you should consider first. One of those is location. How convenient is it to your intended destination? If you intend on visiting family or friends in the area but you aren’t particularly keen on spending most of your time at their homes, it might be better to rent a vacation home in a quiet, secluded, and possibly out of the way location. If you’re looking to rent a vacation home as a base for renting vacation homes to others, make sure it is in an area that you know is convenient for those you will be bringing with you. Also keep in mind that you might not always want to be staying at the actual dwelling during your stay.

Before you even contact the IRS or local authorities to report a rental property, you should have some kind of tenants’ history established. As part of your rental property transaction agreement, be sure to include a written statement from the tenant describing their income, debts, and assets. Such information can make the process of recovering unpaid taxes much easier for you and the IRS agent assigned to your case.

Another thing to consider is to include any necessary expenses related to maintaining the rental property. These expenses include utility bills, repair, and maintenance expenses. All necessary expenses must be itemized deductions. As long as these expenses are properly documented and the receipts are collected on a timely basis, most taxpayers will be able to take a deduction for them. However, it’s still a good idea to get an appraisal to ensure that you are not under-determining what is necessary and what isn’t.

Now that you’ve got all of the necessary information, it’s time to start preparing your tax returns. To determine which expenses are deductible, you’ll need to allocate a percentage of your rental income to each category. For example, expenses for utilities and maintenance should be itemized and included on your income statement, while other expenses, such as travel, meals, and gifts, should be taken off the statement because they are considered a personal use. Personal use includes any expenses for repairs and improvements related to the rental property only. Any amount that exceeds the personal use amount is deductible as a business expense.

Now, that you understand how the rules apply to rental income, you should be better prepared to handle your tax situation should you ever become required to report a loss on your return. If you are, you’ll probably find the process is much simpler than you first anticipated. It will likely require that you obtain a new residential address, but this shouldn’t be a major problem as long as you can qualify to continue living in the property for the full 15 days. If you move before the end of the year, however, you may lose the ability to receive depreciation benefits on the property. As long as you move out before the deadline, you should be fine.