Most accountants will tell you that reporting rental property on a tax return can get complicated which is why their fee is usually higher to do so. Yet, this is not always true as the complexity often depends on how the rental property is used.
Are you operating the rental property with a profit motive?
To identify the tax reporting requirements for rental property, the first step is to determine if there is a profit motive. The IRS has a strict definition for a profit motive which includes collecting rent at its full fair market value and owning the property for investment purposes. If you rent the property to a friend and only charge them based on the cost for operating the property such as utilities and mortgage interest, then there would not be a profit motive (IRC Section 183). As a result, the rental income would be taxable to you but the expenses would not be deductible.
What if I’m operating the rental property for a profit?
You’d be able to report both your income and deductible expenses for operating the property on Schedule E of your 1040. Costs associated with putting the property in service or managing and maintaining it are generally deductible. These eligible deductible expenses include: mortgage interest payments, repairs that aren’t improvements, depreciation expense, administrative expenses, property taxes, insurance premiums, management fees, professional fees and supplies. These expenses are also deductible when the property is temporarily vacant.
If I have a rental loss, does it offset other income on my tax return?
Since rental properties are generally considered passive activities, you are likely limited to offsetting your losses with other types of income. However, if you actively participate by owning at least 10% of the property and you make management decisions, then you could offset up to $25,000 of losses with other income. There’s a catch though. The amount of losses you can offset with other income decreases by $0.50 for every dollar that your modified adjusted gross income (MAGI) is greater than $100,000. If your MAGI is $150,000 or greater, then you would lose the entire $25,000 deduction.
More Questions? Browse Answers or ask your rental property tax questions online.
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