For taxpayers who own residential property, renting is often an additional source of income. If you want to maximize your refund, it is important to understand the different types of rental income and tax deductions available to property owners. Let’s review the types of rental income and associated tax deductions you should be aware of as a rental property owner.
Types of Rental Income to Report
Advanced rent payments – Normal rent payments must be reported of course. If a tenant sends you a payment before they physically occupy a room in your house or send a payment in advance of a future due date, you should consider that amount part of your rental income the year the payment was received.
Non-refundable security deposits – Security deposits may also be included as income if the security deposit does not go back to the tenant when the lease ends.
Cancellation fees – If you receive money from a tenant for a canceled lease, you must include that as part of your income.
Property expenses paid by tenant – If your tenant pays some or all expenses associated with your property, this is considered income, and you must report it on your tax return. Keep in mind these expenses may also be deductible rental expenses.
Tenant services – A tenant’s payment may come in the form of service in lieu of rent. For instance, if the tenant is a landscaper and you and your tenant arrange that your tenant will do landscaping in lieu of paying rent for three months, you should still include the value of three months of rent in your income. Keep in mind you can include that same amount as a rental expense.
9 Tax Deductions You Should Consider
- Mortgage interest deduction – This deduction allows homeowners to deduct mortgage interest on up to $750,000 of qualified residence loans.
- Property tax – The IRS allows you to deduct up to $10,000 for state and local taxes (SALT), which can include what you pay for real property. For properties with shared ownership, the amount of property tax you pay or can deduct will depend on whether ownership is a joint tenancy agreement or a tenancy in common agreement.
- Depreciation – In most cases, you won’t be able to write off the total cost of a rental property the first year you purchase it, but you can depreciate your assets and deduct the expenses over time.
- Repairs – You can deduct repairs like replacing carpet, repainting, fixing the roof, etc. Be sure to keep all receipts to deduct those costs from your taxable income when you file.
- Insurance Payments – You can deduct the premiums you pay for coverage related to your rental. This includes coverage for landlord liability, theft, fire, and flood.
- Home office – Do you operate your rental activity out of a designated space in your home? You may be able to claim the home office deduction.
- Professional and legal services – If you pay a lawyer, accountant, or other professional to do work specifically related to your rental, those fees are considered operating expenses and can be deducted on your tax return.
- Pass-through tax deduction – Owners of pass-through entities may be eligible to claim the qualified business income (QBI) deduction on an individual return.
- HOA Fees – Homeowner and condominium association fees are not deductible for your primary home, but they are considered deductible expenses for rental properties.
Expenses that are not deductible
Generally, personal expenses that are not directly related to the rental property are not deductible. Here are some common non-deductible rental expenses:
- Lost rent – The loss of income from a tenant not paying or a vacant rental property is not deductible (unless you use accrual accounting rather than cash accounting).
- Major renovations – Generally, repairs and maintenance that are considered ordinary and necessary expenses can be deducted. However, improvements that increase the property’s value are not typically a deductible expense.
- Commuting – While travel expenses for an overnight stay away from home (for business) may be considered eligible expenses, this does not include a daily or occasional commute to your rental property.
Renting through a third party like VRBO or Airbnb? Read more tips for filing taxes as a rental host. For more information on residential rental properties, refer to IRS Publication 527.
