Renting Residential and Vacation Property According to the IRS

If you receive rental income for the use of a dwelling unit, such as a house or an apartment, you may deduct certain expenses. These expenses, which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that ends up being subject to tax.

For individuals, these expenses are typically reported on a Form 1040 and Schedule E. If you are renting to make a profit and do not use the dwelling unit as a residence, then your deductible rental expenses may be more than your gross rental income. Your rental losses, however, generally will be limited by the "at-risk" rules and/or the passive activity loss rules.

If you rent a dwelling unit to others that you also use as a residence, limitations may apply to the rental expenses you can deduct. You are considered to use a dwelling unit as a residence if you use it for personal purposes during the tax year for more than the greater of: 1) 14 days, or 2) 10% of the total days you rent it to others at a fair rental price.

It is possible that you will use more than one dwelling unit as a residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a residence unless you rent your vacation home to others at a fair rental value for 300 or more days during the year in this example.

A day of personal use of a dwelling unit is any day that it is used by:

• You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home and the other owner pays a fair rental price under a shared equity financing agreement

• A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price

• Anyone under an agreement that lets you use some other dwelling unit

• Anyone at less than fair rental price

There is a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses. The professionals at The Center for Financial, Legal, and Tax Planning are more than knowledgeable with regards to the real estate/rental tax code and other ways to minimize your tax burden. Please contact us at (618) 997-3436 with any questions.