TaxMama Rental Property Tax Law and Information


Capital Gains Tax on Rental Property

Rental Property Tax Deductions

  - Deadbeat Renters
  - Home Sweet Home
  - Sched C or E?
  - Vacation Rental
  - PMI

Depreciation of Rental Property

Mixed-Use Residential Property

IRS Forms


Tax Deductions on Rental Property

How to Determine and Report Deductions on Residential Rental Property

The Basic Rules:

  • You may deduct the expenses of maintaining rental property, even if the rental was not generating income.

  • Rental income and expenses are reported on Schedule E of your personal tax return. Or Form Form 8825 for partnerships and S Corporations.

  • Your deductions, if you have a loss, are limited to $25,000 for a single or jointly filed tax return ($12,500 for married filing separately), if your modified adjusted gross income is $100,000 ($50,000 MFS) or less. Between $100,000 and $150,000, your deduction drops to zero. Here's a link directly to relevant IRS published information.

  • To be able to use any deductions, in excess of income, you have to meet the passive activity rules that you will find in IRS Publication 527. Essentially, you must be actively managing the property yourself. If you hire a management company to find new tenants, effect repairs, deal with all the tenant and property issues – your deductions will be limited to your income.

  • Unused deductions are carried forward until one of two things happen – you have rental income, or you sell the property.

  • Typical rental property tax deductions include mortgage interest, property taxes, insurance, utilities, gardener/landscaper, routine repairs and maintenance. When it comes to appliances, improvements and major repairs, you may have to depreciate those costs.

  • Bonus Tip: Go to your local Lowes, Home Depot or other home repair store and take their classes on how to do repairs. Not only will you gain valuable skills, but you’ll get discounts on purchases – and get to deduct the costs of the classes on your rental schedules. Besides, you’ll also get a better idea of whether or not your repair companies are doing a good job.


    Deadbeat Renters

    Dear TaxMama,

    We have filed two extensions this year because I do not know how to deduct a large loss.

    I rented my house in Pittsburgh while I was attending a university in Michigan. I had tenants who paid rent for the first 6 months of 2001. Then a "friend" of one of the tenants moved in uninvited with his three children, and without my authorization. He never paid rent and his presence forced out all the paying tenants including his "friend."

    We asked him to leave several times, and sent a formal eviction letter, but he wouldn't leave. He called the police when my wife and I came to the house. They told us that he had residency, because his car was stolen during the time he squatted in our house, and used our address on the police report.

    We finally had to go to the courts to get an order for him to leave. This took time and he finally left in December of 2001.

    We couldn't earn any income on our rental property because he was squatting in the house. We still had to pay the mortgage and property taxes, as well as our apartment in Michigan.

    Can I deduct money he prevented us from earning?

    Please help. Any advice is appreciated.

    ••• Tax Mama Replies •••

    Dear Mark,

    Sounds like you had a terrible time with this guy.

    Well, the good news is, you can still use Schedule E to report all the expenses, just as if you had received rent all year. You may want to attach a statement (a note) to your tax return that outlines why there is little or no rental income.

    Something that will include this:

    Rental income is low because we had a non-paying squatter in this property until December of 2001. He had taken over the unit from the legitimate tenants in June. We did not get rent for the last six months of the year. We spent time and money to evict him. Eviction was finally effective at the end of the year.

    If you have a copy of the eviction notice, showing the date, it wouldn't hurt to include it at the back of the tax return.

    Some low-life nasties really know how to play the rental game. They don't understand the destruction they create in other people's lives when they steal from 'rich' landlords.

    And naturally, after eviction, there's no point in trying to collect the judgment, since they'll never have the means to pay. These people are among the scum of the earth.

    When you come across someone like this, you may as well just start with the courts in the first place. Don't even waste your time.

    For future reference, there is one way to get these guys out sooner. It's really demeaning (to you), but it works. And they know the game. Offer them money to move. Offer them $1,000 or so (depending on the rental value). They'll take it and get out. And yes, they will typically leave some deliberate damage to your house so you can remember them.

    You have my sympathy. And you also have the full deductions.

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    Home Sweet Home

    Dear TaxMama,

    Last April, I purchased a house for my disabled mother (she had a heart transplant in March).

    The house is in my name but she pays $80 of the $234 mortgage? What is the best way to account for this on my tax forms.

    ••• Tax Mama Replies •••


    You just take a deduction for the interest that you paid. The interest your mother is paying is probably too low to generate a deduction for her.

    I think the intent is pretty clear. I doubt anyone would consider this income to you.

    There has been case law where the IRS (or the courts) did recognize the real ownership of a residence when the transaction was among family members.

    Incidentally, if the mortgage is too low to itemize it, you might want to see if your mother might be qualified as your dependent. (If you provide over half of her support.)

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    Sched C or E?

    Dear TaxMama,

    Can I deduct mortgage interest on a rental property, which I use less than 14 days?

    I'm already maxed out on qualified home mortgage interest, am fully at risk and hold this for investment, which is my business. Schedule C, line 16, or schedule E, line 12?


    ••• Tax Mama Replies •••

    Hi Jon,

    You should be able to deduct the interest on Schedule E, which has all the limitations of rental income and passive losses. You seem to understand what that's all about.

    But, if you're already maxed out on mortgage interest, odds are that your adjusted gross income is higher than $125,000 and you can't use the passive losses.

    So, you want to deduct the interest on Schedule C? Darlin' don't come to me for dispensation. It won't come from me.

    Sit down with a good local tax pro who understands the difference between passive investment rules, real estate and property management issues. There may a way around all this, but they'd need much more in depth information than you can provide in this quickie forum.

    Incidentally, I will give you one VERY valuable tip. It's really worth a fortune if you pursue this advice. It can remove your real estate activity from the passive loss rules and turn it into a Schedule C business.

    Convert your rental property to hotel/business property. Provide other services, like maid service, concierge service (pick up dry cleaning, groceries, run certain errands) etc. You've just sidestepped the passive loss rules.

    But it MUST be legitimate and you may have to register with your city or state under their hospitality rules and collect/pay hospitality taxes.

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    Vacation Rental

    Dear TaxMama,

    I've been searching IRS regs on rental properties and have not found simple guidelines for deducting expenses for a 2nd home/rental.

    1. What is the minimum time one has to rent a 2nd home to qualify deducting expenses, like mobile park monthly fees?

    2. What expenses to upgrade the property are deductible?

    3. Is there a simple guideline available from the IRS?

    Dr. Paul

    ••• Tax Mama Replies •••

    Dear Dr. Paul,

    Simple, no! LOL. These are tax laws.

    Useful, however, is another matter. Publication 527 is literally called: Residential Rental Property (Including Rental of Vacation Homes)

    One of the areas people often overlook when they are computing the total personal use days is when they rent to "Anyone at less than a fair rental price."

    How often do you let a friend use it for free or just the cost of the maid service to clean up? uh huh!

    Read the information slowly. It does get a bit confusing. (OK, it takes about three passes to get it.)

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    Hi TaxMama,

    Is the cost of PMI Mortgage Insurance for a residential rental property deductible?

    ••• Tax Mama Replies •••

    Hi Michelle,

    You bet! And frankly, I hadn't even thought of it.

    Great idea! Thanks for bringing it up.

    [Note: Folks, usually when you report your mortgage interest to your tax pro (or give them the 1098 form with the amount), this question isn't even brought up. For personal purposes, it is not an issue, so don't bother with it. But, Michelle is quite right - on rental properties, (and residences converted to rental properties) this is a valid cost of doing business. DO remember to get that amount for your tax return. PMI is a legitimate rental property deduction. Eva]

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