Summer is here and vacations are in the air. Perhaps, it is also time to think about how we can pay for our vacation with income from an investment property purchased to rent. As we discussed yesterday, if you receive income from renting property for use as a dwelling, such as a house or apartment, you may need to report the income, and you may be able to deduct certain expenses.
To make your tax life easier and less confusing for you, your tax preparer, and the tax authorities, be clear about your goals for the rental property. Are you using the property partly for your own use and renting it out when you aren’t using it or are you operating it solely for a profit? If you are using the property yourself and renting it, divide the portions of expenses between your investment and your personal tax forms based on days used or percentage used, and you will not run into tax trouble.
Types of Rental Expenses
In most cases expenses related to renting your property are deductible. These deductions can be applied against the income you receive from rent to lower the amount of the rental income that is subject to tax. These would general be reported on a form 1040. According to the IRS, if you use the investment property to rent for a profit and do not use the dwelling as a residence, or for personal use, then your deductible rental expense may add up to more than your gross rental income. 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, real estate taxes, casualty losses from federally declared disasters for the rented part, realtor’s fees, and advertising costs.
Deductible expenses include:
- Auto and travel expenses (if the primary purpose of the trip is to collect rent or to manage, conserve, and maintain your rental property)
- Cleaning and maintenance
- Realtor and Online Commissions
- Depreciation: This expense begins when the property is rented or placed in service. It is taken over the lifetime of the property to cover the cost of the original purchase.
- Interest on loans other than the mortgage
- Legal and other professional fees
- Local transportation expenses (those incurred collecting rents, managing, conserving, or maintaining your property)
- Management fees
- Mortgage interest paid to banks, etc.
- Mortgage expenses, including mortgage commissions, abstract fees, recording fees, are not deducted as expenses, but are considered part of the basis of your property as capital expenses and are depreciated.
- Points. Points are prepaid interest and are deducted over the life of the loan and not all in the year the loan was made.
- Pre-rental expenses: Expenses incurred maintaining your property from the time you make it available to rent
- Rental payments for equipment
- Rental payments for the property you lease
You can deduct expenses incurred maintaining and preserving your property when it is vacant, or vacant while listed for sale.
Uncollected Rent – Not Deductible
Don’t deduct uncollected rents. It is not included in your income, so it cannot be deducted.
Renting to Your Employer
If you rent part of your home to your employer and provide services for your employer in that rented space, report the rental income. Claim the income and deduct the expense for that portion of the house. You can deduct mortgage interest, real estate taxes, casualty losses from federally declared disasters for the rented part of your home.
I would like to help you with funding for an investment rental property or vacation rental. I have a long-term rental loan program that can help you get into an income-producing vacation rental investment property.
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
Image Credit, vacation rental, Seattle. Fred Ueckert, FJU Photography [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)%5D