Rental Real Estate Taxes

There are a few perks that come from owning a real estate property--namely the income you make from it. However, by owning real estate, it can also complicate your taxes. With tax day fast approaching, here are some frequently asked tax questions for rental property owners. 

What form should I use to report rental income?

Using a form 1040, you will report rental income in schedule E. Be sure to include all information about the rental revenue, expenses, and depreciation. If you have more than three rental properties, you’ll need to fill out multiple schedule E forms. 

What should I include in my records of income and expenses?

The IRS closely monitors taxes that are filed with a schedule E, so you must keep thorough records. Your records should include copies of canceled checks, receipts, and other monetary communications. Plan on creating a filing system as you’ll want to keep track of these records for up to three years. 

What is included in rental income?

Rental income includes any advanced rent payments, any part of the security deposit that you keep, expenses unrequired by your tenants that they pay anyway, or services received from your tenants instead of monetary rent payments. 

What is the depreciation expense?

Depreciation is one of the larger selling points of owning a rental property. Since real estate typically has a useful lifespan of more than a year, the cost of purchasing one is deducted over  27.5 years (for residential properties). You can deduct a sum based on the price of the property and the value of the land each year as your depreciation expense. The depreciation expense does not include any other deductions you make. 

What other deductions can I note on my taxes? 

Luckily, you don’t have to pay taxes on all of your rental income. This is to allow property owners to have the means to clean and maintain their property, pay mortgage interest, cover insurance costs, make payments to a property manager, or to pay for other expenses directly associated with the property. 

What if I don’t rent my property for a whole year?

If you own a vacation rental property and only rent it for 14 days of the year, you don’t need to pay income tax on that rental income. However, when/if you sell the property, you mark any profit as part of your personal residence, not an investment property. 

What if I want to stay in my vacation rental property?

“To treat a property as a rental property for tax purposes, you cannot use it more than 14 days per year or 10% of the days it was rented, whichever is greater.” Meaning, if you rented the property for 200 days, you could not use it for more than 20 days. If you do, you won’t be able to mark a loss on your taxes. 

Taxes on rental properties sometimes give owners a large tax break; though that doesn’t make them simpler to fill out. If you are at all confused with your taxes for your rental property, ask a professional for help. Since the IRS is closely monitoring your taxes, you don’t want to make any mistakes.