Tax Facts For Renting Your Residential Property

Published on

People often rent out their residential property as a source of income, particularly during the vacation-heavy, warm summer months. Different tax rules apply depending on if the taxpayer renting the property used the property as a residence at any time during the year.

Residential rental property can include a single house, apartment, condominium, mobile home, vacation home or similar property. These properties are often referred to as dwellings. Taxpayers renting property can use more than one dwelling as a residence during the year.

A dwelling is considered a residence if it’s used for personal purposes during the tax year for more than the greater of 14 days or 10 percent of the total days rented to others at a fair rental value. In general, personal use includes use of the property by:

  • Any person who owns an interest in the property,
  • A family member of any person who owns an interest in the property (unless it’s the family member’s principal residence and the owner receive fair rental value),
  • Anyone who has an arrangement that lets the owner use some other dwelling or
  • Anyone using the property at less than fair rental value.
  • Personal use doesn’t include days of repair and maintenance, if the taxpayer is doing the repairs and maintenance on a largely full-time basis. Rental income includes:

Rental income includes:

  • Normal rent payments
  • Advance rent payments
  • Payments for canceling a lease
  • Expenses paid by the tenant

Rental income generally doesn’t include a security deposit if the tax- payer plans to return it to their tenant at the end of the lease. But if the taxpayer keeps part or all the deposit during any year because the tenant doesn’t live up to the terms of the lease, then the taxpayer includes the amount kept as rental income in that year.

If a taxpayer has any personal use of a dwelling that they rent, they must divide their expenses between rental use and personal use. They must divide expenses even if the dwelling doesn’t meet the definition of a residence. Furthermore, the amount of rental expenses that a taxpayer can deduct may be limited if the dwelling is considered a residence.

Taxpayers can deduct the ordinary and necessary expenses for man- aging, conserving and keeping their rental property. Ordinary expenses are common and generally accepted in the business, such as deprecia- tion and operating expenses. Necessary expenses are appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.

If the taxpayer includes expenses paid by a tenant, the fair market value of the property or services given by a tenant in their rental income, then normally they can deduct that same amount as a rental expense.

The taxpayer may not deduct the cost of improvements to better, re- store or change the property to a different use. The taxpayer recovers the cost of improvements through depreciation. The taxpayer can only deduct a percentage of these expenses in the year that they incur them.

For more information about new rules and limitations for depreciation and expensing visit