Owning rental property can be a great source of income, but it also comes with tax obligations. Whether you’re renting out a single-family home, an apartment, or even a room in your house, the IRS requires you to report rental income and related expenses accurately. Here’s a straightforward guide to help you navigate the process.
What Is Rental Income?
Rental income includes all payments received for the use or occupation of property. This can include:
- Monthly rent payments
- Advance rent (e.g., first and last month’s rent)
- Security deposits that are not returned
- Lease cancellation fees
- Expenses paid by the tenant that are your responsibility (e.g., repairs)
Which IRS Form Should You Use?
If you rent real estate as an individual (not through a business entity), you’ll report income and expenses on Schedule E (Form 1040), Supplemental Income and Loss.
Schedule E includes:
- Location and type of the property
- Total rents received
- Expenses (e.g., advertising, insurance, repairs, taxes, depreciation)
- Net income or loss
Common Deductible Rental Expenses
You can reduce your taxable rental income by deducting legitimate expenses. Common examples include:
- Mortgage interest
- Property taxes
- Insurance premiums
- Utilities (if you pay them)
- Repairs and maintenance
- Advertising costs
- Property management fees
- Depreciation (typically over 27.5 years for residential property)
Note: Improvements (like installing a new roof or remodeling a kitchen) must be depreciated, not deducted all at once.
Depreciation: A Key Tax Benefit
Depreciation allows you to deduct the cost of the rental property (excluding land) over its useful life. You begin depreciating when the property is ready and available for rent, not just when it’s occupied.
What If You Only Rent Part of Your Home?
If you rent out part of your primary residence (like a basement or a single room), you’ll need to allocate expenses between personal and rental use. You can only deduct the portion that applies to the rental area.
Personal Use of the Property
Be careful if you use the rental property yourself (such as a vacation home). If you use it for more than 14 days or 10% of the days it’s rented (whichever is greater), it’s considered a personal residence. In this case, you can only deduct rental expenses up to the amount of rental income—no loss can be claimed.
Recordkeeping Is Essential
Keep detailed records of:
- Rent received
- Expense receipts and invoices
- Proof of repairs and improvements
- Copies of leases
- Depreciation schedules
Having accurate records ensures you can justify your deductions if you’re ever audited.
Conclusion
Reporting rental income properly helps you stay compliant and maximize your deductions. While it can be a bit complex, especially with depreciation and partial use situations, understanding the rules can save you time and money. If you’re unsure or have multiple properties, it’s wise to consult a tax professional.