If you’re a landlord, property manager, or rental property owner, it’s important to be aware of the IRS self rental rules. These rules dictate how rental income and expenses are reported on your taxes. Keep reading to learn more about the IRS self rental rules and how they may affect you.
The basics of the IRS self rental rules
Generally speaking, the IRS self rental rules state that rental income and expenses must be reported on Schedule E of your tax return. This is the case whether you own one rental property or several.
IRS Schedule E is the form used by landlords to report rental income and expenses on their tax return. The form has three parts: Part I is used to report income from rentals, Part II is used to report expenses, and Part III is used to calculate the net profit or loss from the rental property. To complete IRS Schedule E, you will need the following information:
- The name, address, and taxpayer identification number of the landlord
- The names and addresses of all tenants
- A description of the property
- The date the property was rented
- The amount of rent received
- The expenses incurred in operating the rental property
Completing and filing Schedule E
Once you have all of this information, you can begin filling out IRS Schedule E. Part I requires you to report your total rental income for the year. This includes all rent received from tenants, as well as any other income earned from the property (such as parking fees or laundry income).
In Part II, you will report all of your rental expenses. This includes items such as advertising, repairs and maintenance, insurance, taxes, utilities, and cleaning expenses.
Finally, in Part III you will calculate your net profit or loss from the rental property. To do this, simply subtract your total expenses from your total income. If you have a positive number, this is your net profit; if you have a negative number, this is your net loss.
Why Schedule E matters
IRS Schedule E is an important form for landlords because it helps to determine how much tax they owe on their rental income. By correctly reporting their income and expenses, landlords can minimize their tax liability and ensure that they are in compliance with IRS rules.
There are some exceptions to this general rule for using a Schedule E, however. For example, if you rent out a room in your primary residence (i.e., the home where you live), then the income and expenses related to that room can be reported on Schedule C of your tax return instead.
It’s also important to note that the IRS self rental rules apply regardless of whether you rent out your property to a tenant or to a business using shared office space. So, if you own an office building that you rent out to businesses, the income and expenses related to that property must still be reported on Schedule E.
12 common rental expense deductions for landlords
Being a landlord comes with a lot of responsibilities . . . and a few perks too.
One of those perks is the ability to deduct certain rental expenses on your taxes. Now that we’ve reviewed the basics of the IRS self rental rules, let’s take a look at some of the common expenses that can be deducted when you own rental property.
1. Advertising
Any money you spend advertising your rental property, whether it’s online, in the newspaper, or on a sign hung outside the property, is deductible. This also includes the cost of any background or credit checks you run on potential tenants.
2. Insurance
You can deduct the cost of any insurance you carry on your rental property, including things like liability insurance, flood insurance, or windstorm insurance. If you have a mortgage on the property, your lender will likely require you to carry some or all of these types of insurance anyway.
3. Interest
If you have a mortgage on your rental property, the interest payments are tax-deductible just like they would be on any other type of loan. You can also deduct interest on credit cards or lines of credit used to make improvements to the property or pay for other related expenses. Just be sure to keep good records so you can show how much was spent on improvement versus day-to-day expenses.
4. Legal and professional fees
Any fees you pay to attorneys, accountants, or other professionals for services related to your rental property are deductible. This might include things like filing fees associated with evicting a tenant or getting approval for zoning changes. It also includes membership dues for any professional organizations you belong to that relate to landlords or rental properties.
5. Maintenance and repairs
The cost of maintaining and repairing your rental property is deductible, including things like painting, fixing leaks, mowing the lawn, and shoveling snow. However, any major renovations or additions do not qualify as repairs and cannot be deducted as such. These sorts of improvements must be depreciated over time instead. (More on that later.)
6. Property taxes
Like most homeowners, landlords also have to pay property taxes throughout the year. Fortunately, these taxes are also deductible when it comes time to file your taxes . . . which can help offset some of the sting come April 15th!
7. Utilities
If you include utilities as part of the rent you charge your tenants each month, then you can deduct a portion of those costs when you file your taxes. The key here is that the utilities must be included in rent; if tenants pay their own utilities separately from rent, then those costs are not tax-deductible for landlords.
8. Supplies
From lightbulbs and trash bags to paint and carpet cleaner, any supplies you purchase specifically for use in your rental units are deductible.
9. Depreciation
Any improvements made to a rental unit must be depreciated over time rather than deducted in full in the year they were made. For most types of improvements, this means taking a deduction each year for 27½ years for a residential rental property and 39 years for a commercial building.
10. Travel
If you have to travel away from home overnight for business related to your rental properties—such as attending a landlord convention or meeting with potential tenants —you can deduct your travel expenses. Just be sure to keep good records and receipts so you can show how much was spent on business versus personal travel.
11. Home office expenses
If you use part of your primary residence as an office for managing your rental properties – and provided that space is used exclusively for business purposes – you may be able to deduct a portion of your mortgage interest, insurance, utilities, and repairs as business expenses.
12. Losses due to casualty or theft
In some cases, landlords may be able to deduct losses incurred due to damage from events beyond their control, such as fires, floods, earthquakes, or vandalism. However, these deductions are subject to certain limits and conditions set by the IRS, so it’s important to speak with a tax professional before claiming any casualty or theft losses on your tax return.
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