If you own investment or rental property, TurboTax will help you with deductions, depreciation, and getting your biggest possible refund.
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Consider this scenario:
After buying a condo and living in it for several years, Sue meets Steve, marries him and moves into his house. Because the rental market in their area is improving, they decide that instead of selling Sue's condo, they could make some money by holding on to it and renting it out. But as first-time landlords, they don't know whether they need to report the rent they receive on their tax return and, if so, whether any of the money they spent to get the condo ready to rent is deductible.
Does this story sound familiar? If so, you're not alone. Taxpayers in similar circumstances find themselves asking these questions:
Yes, rental income is taxable (with few exceptions), but that doesn't mean everything you collect from your tenants is taxable. You're typically allowed to reduce your rental income by subtracting expenses that you incur to get your property ready to rent, and then to maintain it as a rental.
In general, you are required to report all income on the return for the year you actually receive it, even though it may be credited to your tenant for a different year.
Security deposits are not included in income when you receive them if you plan to return them to your tenants at the end of the lease. In contrast, deposits for the last month's rent are taxable when you receive them, because they are really rents paid in advance.
If you eventually keep part or all of the security deposit because the tenant does not live up to the terms of the lease, you are required to include that amount as income on your tax return for the year in which the lease terminates. Of course, if you withhold the security deposit to cover damages caused by the tenant, the cost of repairing such damage will be deductible, and offset the income from the forfeited security deposit.
So, you should keep track of the security deposits from year to year. This record-keeping isn't difficult if you only own one rental property, but as the number of rentals you own increases, so does the paperwork.
You can rent out your vacation home only for a limited amount of time each year if you want to fully deduct losses on your rental property. To be treated as a rental property for tax-loss purposes, your personal use of the place can't exceed 14 days or 10% of the days the unit is rented during the year, whichever is greater. While 10% may sound like a lot, it really isn't when you figure that a seasonal rental may only be in demand for two or three months each year.
Costs you incur to place the property in service, manage it and maintain it generally are deductible. Even if your rental property is temporarily vacant, the expenses are still deductible while the property is vacant and held out for rent.
Deductible expenses include, but are not limited to:
All expenses you deduct have to be ordinary and necessary, and not extravagant. You can deduct the cost of travel to your rental property, if the primary purpose of the trip is to check on the property or perform tasks related to renting or managing the property. If you mix business with pleasure, though, you're required to allocate the travel costs between deductible business expenses and nondeductible personal costs. Be careful not to cheat yourself on the breakdown.
Consider this example:
John, who lives in North Carolina and loves to ski, owns a rental condo in Park City, Utah, which he visits each January to get the place ready for that season's tenants. His travel expenses are deductible if, for example, the primary purpose of his trip is to clean and paint the unit. Let's say that during a five-day visit to the condo, John spends three days cleaning and painting and two days skiing.
Some advisors would say he gets to deduct 60% of his travel costs, since 60% of the time was spent on the business of tending to his rental unit. But following that advice would be a costly mistake.
Now, if John spent three days skiing and two days working on the condo, none of his travel expenses would likely be deductible, although the direct costs of working on the condo (the cost of paint and cleaning supplies, etc.) would be deductible rental expenses.
To deduct any expense, you need to be able to document the write-off. So, hold on to all receipts, cancelled checks, and bank statements.
To understand more about rental property tax deductions, visit our Rental Property Deductions article.
Both property improvements and repairs are tax-deductible, but you typically handle them differently. The cost of repairs can be written off in the year you pay them, but improvements generally have to be capitalized and depreciated over several years (by following IRS depreciation tables).
Ah, there's a big difference between improvements and repairs. The cost of property improvements generally has to be capitalized and depreciated over several years (by following IRS depreciation tables) rather than deducted in the year paid. By contrast, the cost of repairs can be written off in the year you pay them.
Improvements are actions that materially add to the value of the property or substantially prolong its life. Examples include:
Repairs, on the other hand, just keep the property in good operating condition. Examples of repairs:
Depreciation is a deduction taken over several years. You generally depreciate the cost of business property that has a useful life of more than a year, but gradually wears out, or loses its value due to wear and tear, weather damage, etc. To figure out the depreciation on your rental property:
1. Determine your cost basis
Your cost basis in the property is generally the amount that you paid for the property (your acquisition cost plus any expenses), including any money you borrowed to buy the place.
If you are converting your property from personal use to rental use, your tax basis in the property is calculated differently. Your basis is the lower of these two:
If the property was given to you or if you inherited it, or if you traded another property for the current property, there are special rules for determining your tax basis in your rental property.
2. Allocate the cost by type of property
After determining the cost or other cost basis for the rental property as a whole, you need to allocate the basis amount among the various types of property you're renting. Types of property refers to certain components of your rental, such as the land, the building itself, any furniture or appliances you provide with the rental, etc.
Why this effort to divide your cost basis between property types? They are each treated differently when depreciating, using different rules and different lives.
3. Calculate the depreciation for each type of property
Here are the most common divisions of tax basis for a rental property, followed by explanations of the different methods of depreciation that generally apply:
| Type of Property | Method of Depreciation | Useful Life in Years |
| Land | Not allowed | N/A |
| Residential rental real estate (buildings or structures and structural components) | Straight line | 27.5 |
| Nonresidential (such as commercial property) rental real estate | Straight line | 39 |
| Shrubbery, fences, etc. | 150% declining balance | 15 |
| Furniture or appliances | 200% declining balance | 5 |
With straight-line depreciation, the cost basis is spread evenly over the tax life of the property. For example:
A residential rental building with a cost basis of $150,000 would generate depreciation of $5,455 per year ($150,000 / 27.5 years).
This kind of depreciation is calculated by multiplying the rate, 150% or 200%, by the straight-line depreciation calculated based on the adjusted balance of the property at the start of the year over the remaining life of the property. To make matters somewhat easier, the IRS and others publish tables of percentages that can be applied to the original cost to determine yearly depreciation.
For instance, here's the 200% declining balance table for five-year property:
The 200% declining balance depreciation on $2,400 worth of furniture used in a rental would be $461 in Year 3 ($2,400 x 19.20%).
Bonus Depreciation: Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used. The new rules allow for 100% bonus "expensing" of assets that are new or used.
The percentage of bonus depreciation phases down in:
This bonus "expensing" should not be confused with expensing under Code Section 179 which has entirely separate rules.
Taxpayers can make an election to opt out of the new bonus depreciation rules and use 50% bonus first year depreciation per the prior rules for the first tax year ending after September 27, 2017.
Tables for all types of properties can be found in IRS Publication 946: How to Depreciate Property. For general information on depreciation of rentals, see IRS Publication 527: Residential Rental Property.
As an individual, you report the income and deductions for rental properties on Schedule E: Supplemental Income and Loss. The total income or loss computed on Schedule E carries to page 1 of your Form 1040.
Report the depreciation of rentals on Form 4562: Depreciation and Amortization.
As a general rule, rental properties are, by definition, passive activities and are subject to the passive activity loss rules. These rules are quite complex. In general, the passive activity rules limit your ability to offset other types of income with net passive losses.
But the good news is there is an exception: If you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss even though it’s passive. To actively participate means that you both:
But this exception phases out as your income rises.
Phil and Mary have modified Adjusted Gross Income of $90,000 and a rental loss for the year of $21,000. They actively participated in the rental. Since their modified Adjusted Gross Income is below the $100,000 phase-out threshold, their entire rental loss is deductible even though it is a passive loss.
If you're married and you file a separate tax return from your spouse, and if you lived apart from your spouse at all times during the year, the maximum rental real estate loss exception for you is $12,500, and the exception begins to phase out at modified Adjusted Gross Income of $50,000 instead of $100,000.
If you're married and file separately but you did not live apart from your spouse at all times during the year, the exception for active rental real estate losses is completely disallowed.
To calculate your deductible loss, you may need to complete Form 8582: Passive Activity Loss Limitations according to the IRS instructions.
If you spend considerable time in real estate activities during the year, you may be eligible for a favorable special rule.
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