Tax deductions for rental property imply two concepts, namely deductions for the landlord on income received from this property, and secondly, the property that a tenant uses. Here, an explanation based upon the guidelines set by the IRS has been provided.
The deduction for rental property for a landlord is possible on certain grounds; however, the total amount is restricted. In case of tenement, this becomes possible only when it is used for residence, as well as business purposes. In case of several complex inclusions in your income tax return, to determine the exact value of the deductible amount, you will require a calculator, or a form plus guidelines by the Internal Revenue Service (IRS).
Income and Tax Deductions
Here are some guidelines for landlords, regarding the deductions that they can avail in the income tax return.
Note: From the administrative prospect, the IRS distinguishes between a passive investor and a real estate professional. In the case of real estate professional, who (IRS defined) spends half or more than half of his or her time in the real estate business, a person not qualifying this condition is a passive investor. Full-time investors have the freedom of deducting almost all losses, whereas, in passive income cases, USD 25,000 is the limit. Please check your Modified Adjusted Gross Income (MAGI). If your income is between USD 100,000 and USD 150,000, the deduction phases out.
The following is a list of deductions that you can avail while filling out your returns:
- Depreciation of rental property is the most important and also the most common one. This is applicable as per prescribed rates for your locality and is deducted from the total cost of the asset.
- The second substantial deduction includes fees and interest on the property. Mortgage loan payments or installments on the real estate loans have a certain interest charged on them. This may also include APR and some overhead fees. Such interests are totally deductible. Payable interest or the one that has been reduced or dropped is, however, not deductible. In fact, any kind of debt forgiveness is treated as income.
- The cost of repair and replacement is also fully deductible, though home improvement cost is not, and it is added to the original cost of real estate.
- Theft, casualty, or any substantial damage is deductible to a certain extent, and in accordance with that, the damage inflicted should be reasonable.
- Travel cost for the purpose of the rental property is also deductible, on the basis of certain proofs. For this, it is wise to use the mileage rule, wherein the deductions based upon miles of the car are provided.
- Part of property or home itself, when used as an office becomes deductible. The only principal rule that is applicable is that its part should be primarily used for a business, where economic interest is engaged, and the tax deduction should be ascertained as per the surface area.
- The last one that can be used is that of insurance premium that is paid for the property; the insurance can be of any kind, ranging from theft, property, title, and disaster insurance. In case of remittance or compensation against certain claim, it affects other deductions.
Aspects such as security deposits and accrued income have different treatments; yet in cases where the income is received from the tenant against any loss, it is treated with the loss such as repairs. There are some property deductions such as vacation rental property tax that are totally deducted till a certain extent. Also, note that property rented to family has implications on the same.
From the tenant’s perspective, deductions are less, and the treatment of tax is different. The only one that is available is the one for business use of the property or partial use for business in cases where the property is residential. The respective income limit becomes applicable in certain cases, and employers financial aid and certain aid from the government also come into the picture. The tax implications differ in case of such aids, and the rent becomes deductible. A prominent example is that of grant provided to single parents, especially single moms.
Please note that terms and conditions, laws, and IRS guidelines do change from time to time. Hence, in case of doubt, please confirm with your Form 1040 guidelines and IRS website. The definitions and rules for the rental tax deductions can be found on this website. The reporting of income and deductions is done in the Schedule E of the Form and the related services, incomes, and transactions are provided in the Schedule C.