What Constitutes a Loss on Rental Property Income?
As with any other business venture, you can lose money when you rent out a property. The amount of loss depends on your income and expenses. Generally, you suffer a loss when your expenses exceed the amount of income you earn. As a landlord, particular income sources and expenses determine your loss.
Income
As a landlord, you mainly receive rent as income. Regardless of the period of rent the payment applies to, you have to recognize the income in the year you receive it, according to the IRS. For example, the tenant may pay advance rent for the next six months in October. Although some of the rent applies to the next tax year, you must recognize it this year. Other sources of income include lease cancellation fees, the portion of the security deposit you retain and the value of properties or services you receive instead of rent money.
Expenses
The IRS recognizes several expense items for landlords. You can claim depreciation expense on the rental unit itself, furniture and appliances to take deterioration into account. For example, you claim the cost of acquiring the rental building over 27 1/2 years, which is the length of time set by the IRS as the useful life of residential rental buildings. You can also claim the repair expenses you spend to maintain the rental unit as an expense. Other expenses include advertising fees to find tenants, salaries for property managers, attorney fees for drafting the lease contract and mortgage interest.
Loss
You suffer a loss when your expenses exceed your profits. When this happens, you don't have to pay taxes on your rental income. You usually can't deduct these losses from your nonpassive income, such as wages or salaries. However, if you own at least 10 percent of the rental unit and make decisions related to renting out the property, you can claim up to $25,000 of rental loss against other income, according to TurboTax. To claim this deduction, your adjusted gross income must not exceed $150,000.
Considerations
In some situations, you may not be able to easily determine rental income and expenses. For example, if you rent out only one room in the property, you have to calculate only the income and expenses that apply to the rented portion of the property. If you rent out your home for fewer than 15 days out of the year, you can't consider the resulting income and expenses as rental expenses for tax purposes. If such complicating circumstances apply to you, consult a tax professional for advice.
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