Rental properties allow for an array of deductible expenses for tax purposes that can’t normally be deducted from a personal residence standpoint. Utilities, maintenance, and association fees are solid examples of common rental owner’s deductions.
The principal portion of the mortgage payment is not deductible and personal expenses cannot be placed as deductions on your rental property. The IRS will not look kindly on a claim that a landlord drove 15,300 miles last year in order to maintain a rental property in the same town of their residence.
There is a tax deduction available for depreciation of the building, excluding the land. Depreciation works in favor of rental owners by granting deductions for decreased building value, when real estate typically appreciates in value with regular inflation if properly maintained.
When the property is sold, the basis in the property is reduced by the depreciation claimed over the years you owned it, and you will have to pay in tax on the difference between the sale price and the adjusted basis price on the property.
Loss Regulations and Limits
The IRS has very particular rules concerning passive losses. Rental income is considered passive, meaning you are not directly earning the income as you do at your job.
Passive losses can be deducted from your non-passive income (such as wages from employment), but there are limits. The passive loss deduction limit is $25,000 and based on income. A married couple who owns rentals as supplemental income and has an adjusted gross income of $150,000 can’t claim a passive income loss.
Professional Passive Income Limits
line of keysProfessionals who put more than 50% of their working time into real estate and spend a minimum of 750 hours annually managing each rental activity do not have the imposed passive income limit scale. Holding a full-time job and managing real estate at a self-proclaimed professional level raises a red flag for the IRS.
When the property is sold later on, passive losses can be deducted that weren’t deductible in the year they were incurred. That adds up to a big deduction if there were several years of losses on the property.
If you’re looking for major rental losses to offset your ordinary income, you’ll probably be disappointed and might have the IRS looking at you more closely in years to come.
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