Tax Considerations for Renting
Renting a property to tenants at fair market value is considered a business operation by the Internal Revenue Service, making the income from that rental taxable. Like many other types of business operations, however, many deductions can also be claimed to reduce the tax burden on a property owner. Rental properties are also subject to special rules for depreciation as well as personal use of the property by owners.
Taxable Income
Many types of rental income other than the monthly rental rate paid are considered taxable by the IRS. This includes expenses paid by a tenant to conduct repairs on a property as well as any money paid by a tenant to cancel his lease agreement. Rent paid in advance is taxable during the year that it is received, regardless of whether the rent is being paid for a month of residence during the next calendar year. Security deposits are not generally included as taxable income unless the rental property owner keeps part or all of the deposit, even if the money is taken for necessary repairs.
Deductions
Internal Revenue Service tax rules for rental properties also allow a property owner to take advantage of various tax deductions. Most operating expenses incurred while renting your property, such as mortgage interest, insurance and regular maintenance, may be deducted from your rental income for taxation purposes. Expenses incurred to complete repairs may also be deducted from rental income if those repairs are simply necessary and aren't meant to increase the value of the property. Uncollected rent can also be claimed as a deduction.
Dwelling Unit Used as Home
Properties that are rented may be treated as a home instead of a rental property for taxation purposes if the property owner uses the property for personal use for either 14 days out of the year or 10 percent of the days that the property is rented to others, whichever is greater. The IRS considers one day of personal use to be any day that the property is used by an owner or a family member of an owner, or any one day that the property is rented for less than fair rental price. Too much personal use of a rental property will disqualify an owner's ability to claim most deductions. A property owner using a rental property personally for any amount of time can only claim a percentage of their normal deductions based on the difference between rental use and personal use of the property throughout the year.
Property Depreciation
Property improvements that raise the value of a rental property may be deducted, but that deduction must be depreciated over time rather than applied entirely to that year's taxes. The amount of depreciation that can be deducted from your rental income taxes each year depends on the property's cost basis, how improvement costs are allocated among different parts of the property and standard IRS depreciation rates for dwellings, land and furniture, among other things. The IRS publishes standard depreciation rates for property and other capital investments that typically apply for depreciation deductions.
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