Rental income and expenses are generally reported on Schedule E, Supplemental Income and Loss. Whether you rent your property or not, you can still deduct your rental expenses only up to the amount of rental income.
You should include the following types of payments when reporting your income for rental property:
o Rent paid and advance rent payments (such as first and last month's rent)
o Security deposits not returned to the tenant
o Payment for canceling a lease
o Your rental expenses paid by tenant in lieu of rent
o Property or services you receive in lieu of rent, at fair market value
o All monies, property or services received as rent are reportable as rental income in the year they are received.
Repairs and expenses related to rental property are ordinarily deductible from your gross rental income in the year you pay them. The following are some expenses you can deduct:
o Advertising for renters
o Cleaning and maintenance
o Commissions or management fees
o Insurance premiums
o Local transportation expenses to oversee the property
o Depreciation of rental property
o Legal expenses concerning rental property
o Mortgage interest
o Travel expenses
o Real Estate taxes
o Tax return preparation for rental forms
DEPRECIATION OF RENTAL PROPERTY
You recover your cost in income-producing property through depreciating the property, that is, by deducting some of the cost on your tax return each year. Depreciation is based on the expected life of the item. Residential rental buildings have a 27.5 year life. Business and office building rentals have a 39 or a 31.5 year life. Most improvements that are building components such as a furnace or a new roof will have the same life as the building, with depreciation starting when the individual improvement is placed in service. The cost of the land is never depreciated and must be subtracted from the building’s basis.
Furniture and appliances used in rentals have a five-year life starting when placed in service. Rental property, furniture and appliances, are NOT eligible to be written off all in one year.
The rental house or building MUST be depreciated yearly. When the property is sold, this amount will be treated, by the IRS, as having been deducted and will reduce the basis.
REPAIRS vs. IMPROVEMENTS
You can deduct the cost of repairs that you make to your rental property. However, you may not deduct the cost of improvements. This cost is recovered through depreciation.
A repair keeps your property in good operating condition and does not materially add value to the property. Some examples of repairs are: painting, fixing leaks and cracks, and replacing broken doors or windows or other parts of the rental property.
An improvement adds to the value of your property, prolongs its useful life, or adapts it to new uses. Examples of improvements are: adding a room, a deck, fence or new roof.
VACANT RENTAL PROPERTY EXPENSES
You may deduct rental expenses from the time you make the property available for rent. The expenses incurred and paid in connection with managing and maintaining the property while it is vacant are deductible. However, you cannot deduct the loss of rent income during the period in which the property is vacant.