Tax Implications of Renting Out Property

Renting out a vacation or second residence for part of the year can provide additional income, though this decision has its own set of tax implications that must be understood prior to taking this step.

The IRS treats rental property income as regular taxable income and must be reported on your taxes. Deductible expenses will reduce how much rental income must be reported.

Expenses

Renting out property may not be a surefire way to generate wealth, but it can provide a steady source of revenue. Like any business endeavor, landlords must account for expenses when filing tax returns – many are tax deductible which will help decrease how much tax is due at year’s end.

Subtractable expenses may include purchases related to running your rental business, such as furniture or appliances. Furthermore, improvements you make such as installing a new roof or kitchen may also qualify for depreciation over time; to determine exactly how much deductions are possible you must refer to IRS depreciation schedules.

Additional expenses you can deduct include advertising your rental property to potential tenants, cleaning and landscaping costs, as well as travel between your home and rental property for maintenance, inspections or tenant issues.

Depreciation

The IRS allows landlords to deduct certain ordinary and necessary expenses related to renting their properties, such as mortgage interest, insurance premiums and management fees. Landlords may also claim expenses such as lawn maintenance or repairs as deductible expenses. It should be remembered, however, that not all expenses can be fully deducted; sometimes taxpayers must allocate costs between personal use and rental use.

Travel expenses are an example of this. A landlord who travels between properties can claim travel costs as rental property expenses; if her vacation home falls within 14 days (10%) of being used as rental space.

A seller must account for both capital gains tax and depreciation recapture when selling rental properties, so it is wise to seek assistance from an accountant or tax professional when selling properties that generate rentals.

Taxes

Most rental property expenses are tax deductible. These expenses include mortgage interest, advertising costs and property taxes as well as utility costs such as gas, electricity and water usage – even if your rental property remains vacant or unoccupied.

As part of your landlord-tenant agreement, any services traded in exchange for rent should be reported as income to the IRS. For example, painting the rental house for one month of rent should be considered income and included on your tax return.

Your rental property taxes should be filed using a Schedule E form, which allows you to deduct up to three properties at once. It’s essential that you maintain organized records throughout the year and file accurate taxes so as to avoid fines or penalties from the IRS and lose any significant sum of money due to errors with filings.

Recordkeeping

Record-keeping throughout the year helps landlords track progress, prepare financial statements and account for tax deductible expenses. Records also prove invaluable come tax time – and according to the IRS they recommend landlords separate personal from business expenses by keeping records for each property separately – this makes preparing Schedule E paperwork much simpler!

Importantly, any income received prior to rental income due to your lease agreement must be included on your tax return for the year it was received. For instance, security deposits received ahead of rent must be reported as rental income in that same year they are received. Faulty recordkeeping could land you in hot water with the IRS should they audit or audited your return and find discrepancies; typically they’ll ask for records dating back three years but could ask for seven if previous errors on returns have caused problems.