Taxes and Rental Property

If you got to the beach this summer, you probably noticed those huge vacation homes lining the shore line. Owners rent them out for the season, or by the week or month. Some property owners rent houses or apartments year-round. Others rent out an extra bedroom or their basement for extra money.


Renting out a residence, such as a summer vacation home, when you are not using it, or a portion of your home, you may be eligible to deduct expenses against the rental income. You might even be able to deduct expenses in excess of the rental income and claim a loss that can offset other income. Sounds great; as long as you qualify based on the tax rules and limits.


Four rental property tax rules and limits that you need to know:


  1. Rental Days Personal Days

You cannot claim a tax loss on a rental property for the year if you use it personally for 14 days, or 10 percent of days the home is rented out, whichever is greater. In that case, you can only deduct rental expenses up to the amount of rental income. Exception — a day spent making repairs or improvements do not count as a personal day if you have the records to back it up.


  1. Deductible Expenses

In general, income from a rental property is taxable. Deductions from that income can be taken for expenses related to the rental, such as mortgage interest, property taxes, insurance, repairs, and utilities. If you are renting out your basement or some other portion of your home, expenses related to the rental portion can be allocated to offset rental income. Direct rental expenses, such as painting or repairing the rented portion, can be 100% deducted.


  1. At-Risk and Passive Activity Limits

The deductible portion of losses from rental real estate activity may be limited under two sets of rules: at-risk rules and passive activity limits. These rules apply if you are not at risk of loss for a property placed in service after 1986 that is operated as a passive activity. In most cases, real estate rental activities are considered to be passive. There are exceptions, but these rules can limit deductible losses.


  1. Depreciation

The cost of income-producing property can be deducted yearly by depreciating the property. The amount of depreciation deduction is determined by basis in the property used as a rental, the recovery period established by IRS rules, and the depreciation method used. Depreciation reduces the property’s basis for figuring gain or loss upon sale or exchange.


So if you plan to rent out your vacation property or your basement, you need to know the rules and limitations. Get more details about the tax rules and limits for your rental property from the IRS at