Tax Tips & Calculators

Cash or the fair market value of property you receive for the use of real estate or personal property is taxable to you as rental income.

You can generally deduct expenses of renting property from your rental income. Income and expenses related to real estate rentals are usually reported on Schedule E (Form 1040). Income and expenses related to personal property rentals are reported on Schedule C (Form 1040) or Schedule C-EZ (Form 1040), if you are in the business of renting personal property as a sole proprietor.

Security Deposit

Do not include a security deposit in your income if you plan to return it to the tenant at the end of the lease. But if you keep part or all of the security deposit during any year because the tenant damaged the property or did not live up to the terms of the lease, this money is taxable income in the year this determination is made.

If the security deposit is to be used as the tenant's final month's rent, you include the money as income when you receive it, rather than when you apply it to the last month's rent.

If a tenant pays you to cancel a lease, this money is also rental income and is reported in the year you receive it.

Expenses

Some examples of expenses that may be deducted from your total rental income are depreciation, repairs and operating expenses. You can recover some or all of your original cost and improvements by using Form 4562 (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make an improvement or add furnishings. You cannot depreciate land. You cannot claim the Section 179 deduction for property used in connection with furnishing lodging.

Repairs — A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs. Only out-of-pocket repair costs, such as materials, are deductible.

Improvements — If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses. You can't deduct the cost of improvements, but you can recover the cost of improvements by taking depreciation.

In addition to depreciation and the cost of repairs, you can deduct other expenses, including the following:

• advertising
• cleaning and maintenance
• utilities
• insurance
• mortgage interest (including points)
• real estate tax

Rental Losses

If you actively participate in rental real estate activities, you generally can deduct up to $25,000 of losses from these activities from your other income. The allowable deduction may be reduced if your modified adjusted gross income (MAGI) exceeds $100,000 and will be eliminated if your MAGI is $150,000 or more.

If you're Married Filing Separately, you can't deduct losses if you lived with your spouse at any time during the year. If you didn't live with your spouse at any time during the year, the losses can't exceed $12,500 and may be reduced if your MAGI exceeds $75,000.

Losses you can't deduct because of this rule are carried forward. You can deduct carryover losses in the year in which you meet the requirements or when you dispose of the property in a fully taxable transaction with an unrelated party. See the Schedule E (Form 1040) instructions and Form 8582 for additional information.