Summer is here and our heads are full of vacation plans. Some of us rent summer vacation homes to stay in and some of us rent vacation homes out to others for income.
As a real estate investor, you may be considering buying a property to rent out for income or to remodel and resell. There are four points about income taxes that apply to rental properties that you should know about.
1. If you rent the dwelling for fewer than 15 days a year, you do not have to report any of the rental income and cannot deduct any expenses as rental expenses.
2. If you receive income from renting property for use as a dwelling, such as a house or apartment, you will most likely need to report the income, and you may be able to deduct certain expenses.
3. The accounting method you choose to follow determines when you count income and deduct expenses.
4. Whether you use the property personally for vacations with your family and friends makes a big difference.
The accounting method you use determines when you claim income and deductible expenses.
Types of Rental Income:
Monthly rent is only one kind of income you may receive. You may also receive rent in advance. You report monthly rent when you receive it. A tenant may pay you to cancel a lease. This income you report when you receive it. A tenant may pay some the expenses attributed to the rental dwelling (for example utilities). You declare the expenses paid as income. You can then deduct the expense if they are deductible rental expenses. A tenant may pay you with services (for example painting) or property (for example they construct a built-in grill). In this case you report the fair market value of the service or property as rental income.
Security deposits are not included in your income if you intend to return them to your tenant at the end of the lease. But, if you keep part or all of the deposit, include it as rental income in the year you receive it. If a security deposit is used as the final month’s rent, include it as advanced rental income when you receive it.
According to the IRS, If you use the property for personal use 10% of the time or 14 days a year (whichever is greater) and rent it out at the fair market value for income, limitations apply on the rental expenses you can deduct. You will need to divide the expenses between the personal use and the rental income use based on the number of days of each. Of course for personal use, you will not receive income so there is nothing to report on the personal taxes. When you use the property for both personal and rental use, you will not be able to deduct rental expenses in excess of the gross rental income minus the rental portion of the mortgage interest, reals estate taxes, casualty losses from federally declared disasters for the rented part, realtor’s fees, and advertising costs.
One thing to note about personal use is that if you rent to a relative or friend for a token amount, less than the fair market value of a dwelling just like yours, you have to count this use as personal use, not as investment rental income use.
REI Capital Resources is a direct lender as well as a broker of funding solutions. We offer short and long-term financing options.
Please give me a call when you find that perfect real estate investment and know how much money you need.
IRS Publication 527 (2018) Residential Rental Property
IRS Tax topic 415 Renting Residential and Vacation Property
Vacation rental Image in Florida. Jan Lieberman [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)%5D