Single-family homes and small apartments or office buildings are popular investment vehicles for small investors. Many people consider owning rental houses not much different than owning their own home. Like owning a home, mortgage payments that finance the purchase of a rental property can eat up a large chunk of the rental income. To encourage housing availability for renters, the Internal Revenue Service allows tax deductions on a number of rental property expenses.
Rental Property Deductions
Similar to the home mortgage deduction, interest paid during the year on the mortgages of your rental properties are tax-deductible. The property taxes are also deductible. Unlike the home mortgage deduction, all rental property expenses are itemized on Schedule E. If you own more than one property, the form provides space for the itemization of expenses for each property separately. You can also deduct other rental property expenses, including utilities paid, landscaping, and maintenance and repair costs.
You can fully deduct your mortgage interest and many other expenses for each property if you actively engaged in the management of your properties. To be an active investor, you do not need to make all repairs or physically show the properties to tenants. You can hire a management firm and still be considered an active investor if, for example, you review and approve a tenant’s application or you approve repairs that exceed a certain dollar amount.
If you have a significant net loss on your rental properties, you may encounter limits on what you can deduct. The IRS allows an active investor to fully deduct the total net loss on rental properties up to $25,000 if your modified adjusted gross income is no more than $100,000, you participate in no other passive activities, and you have no current or prior year disallowed losses or credits from passive activities.
Passive or Personal Use
If you were a passive investor, you can deduct the expenses up to the amount of income you received for each respective property. You will also need to complete Form 8582 to determine what portion of the loss, if any, you can offset against other passive income. If you used the house for personal use but rented it out for at least 15 days, as with a vacation home, you can deduct mortgage interest and real estate taxes, but many of the other expenses may not be deductible.
As with the mortgage for your personal residence, the lender must send you Form 1098, a mortgage interest statement, by January 31 following the end of the tax year for each property you own. Keep these and other property expense records to use for completing Schedule E and, if necessary Form 8582.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.