Tax Regulations for Renting Your House
If you rent your primary residence for income, the tax code restricts what expenses can be deducted. If you treated the rental portion of the home as your principle residence during the tax year, you cannot deduct the expenses for the year. However, if you own a home and reserve a part of it exclusively for rent, you can deduct the expenses in maintaining the building in proportion to the amount of space that is rented. Either way, the income and deductible expenses are considered "passive" and are subject to special tax rules.
Principle Residence
If you treat the residential property as your primary home during the year, Section 280A of the tax code prevents you from claiming any deductions related to the property during that tax year. To qualify as a principle residence, the house must be lived in by you or a family member for 14 days or for 10 percent of the number of days during the tax year the unit is rented.
Rent Part of Property
If you own an apartment building or duplex and live in one area of the building while renting the rest, the amount of deductible expenses related to that building is limited. Under the tax code, you can only deduct the expenses related to the building in proportion to the amount of the building that is used for rental activities. This can be done either based on square footage percentage or the number of rented rooms in comparison to the house's total rooms. So, for example, if you live in an 1,800-square-foot house and you rented out a 180-square-foot room, 10 percent of the building's expenses are deductible for rent. In addition to those listed on Form 1040's Schedule E, other deductible expenses include home mortgage interest, insurance premiums, and utility bills.
Passive Income
Renting property is a generally a passive activity for tax purposes. A passive activity is an income generating process in which the taxpayer does not materially participate. The "passive" designation requires all income and expenses from those types of activities to be aggregated together. For example, if you own several rental properties, the expenses from all of the properties can be used to offset the income from all of the properties. If the expenses of these properties exceed the income generated by these activities, the excess cannot be applied to other income earned during the tax year. The excess expenses are held, to be applied against future passive income.
Tax Tips and Disclaimer
For complex returns, consult with a tax professional, such as a certified public accountant (CPA) or licensed attorney, as he can best address your individual needs. Keep your tax records for at least seven years, to protect against the possibility of future audits. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice
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