Rental real estate income is generally reported on Schedule E. Taxpayers deduct allowable rental expenses to determine net gain or loss. When substantial services are provided—such as regular cleaning, linen changes, or maid service—the activity may be reported on Schedule C instead. Substantial services do not include utilities, trash collection, or cleaning of common areas.
Schedule C reporting subjects income to self‑employment tax and removes passive activity limits on losses.
Personal Use Property
A property is considered a home if personal use exceeds the greater of 14 days or 10% of rental days.
If Not Used as a Home
- Report all rental income
- Deduct all rental expenses, even if they exceed income
If Used as a Home
Rules depend on rental days:
- Rented fewer than 15 days
- Do not report income
- Do not deduct rental expenses
- Rented 15 days or more
- Report all rental income
- Allocate expenses between rental and personal use
- Losses may be limited
Personal Use Includes
- Use by owners
- Use by family
- Use by anyone paying less than fair rental value
A day rented at fair value counts as a rental day even if also used personally. Days available but not rented do not count as rental days.
Rental Income
Rental income includes all payments received for use of property.
Advance Rent
Include in income when received, regardless of the period covered.
Security Deposits
- Not income if refundable
- Amounts kept due to tenant default → rental income
- Deposits applied to final rent → advance rent
Expenses Paid by Tenant
If a tenant pays the taxpayer’s expenses, the payment is rental income. The taxpayer may deduct the expense separately.
Property or Services in Place of Rent
Include the fair market value of property or services received.
Rents from Personal Property
- If operated for profit and regularly → Schedule C
- If not a business → report as other income with adjustments
Rental Expenses
Related Expenses
Deductible items include advertising, cleaning, utilities, taxes, interest, commissions, travel, and transportation.
Insurance
Premiums covering more than 12 months must be prorated.
Depreciation
Begin depreciation when the property is ready and available for rent.
- Residential rental property: 27.5 years
- Nonresidential property: 39 years
- Land is not depreciable
Repairs
Repairs keep property in good condition and are deductible. Examples include repainting, fixing leaks, plastering, and replacing broken windows.
Improvements
Improvements add value, extend life, or adapt property to new uses. These costs must be capitalized and depreciated.
Examples: new roof, added rooms, new plumbing, fencing, paving.
De Minimis Safe Harbor
Taxpayers may elect to deduct tangible property costs under:
- $2,500 per item (no AFS)
- $5,000 per item (with AFS)
Additional Considerations
Local Benefit Taxes
Charges for improvements such as sidewalks or sewer systems are capitalized, not deducted.
Vacant Property
Expenses for managing or maintaining vacant rental property are deductible. Lost rent is not.
Uncollected Rent
Cash‑basis taxpayers do not deduct uncollected rent. If the rent becomes uncollectible, it may qualify as a bad debt.
Not Rented for Profit
Expenses are deductible only up to rental income. Losses cannot be carried forward.
Property Converted to Rental Use
Allocate expenses between rental and personal use. Depreciation and insurance are not allowed during personal‑use periods.
Renting Part of a Property
Allocate expenses between rental and personal portions. Depreciate the rental portion and related furnishings.
Limits on Rental Losses
Loss deductions may be limited by:
- At‑Risk Rules
Losses are allowed only to the extent the taxpayer is at risk in the activity. Disallowed losses carry forward.
- Passive Activity Limits
Rental real estate is generally passive. Losses are deductible only against passive income unless an exception applies.
Exceptions
Real Estate Professional
Losses may offset ordinary income if:
- More than half of personal services are in real property trades or businesses, and
- More than 750 hours of material participation
$25,000 Special Allowance
Up to $25,000 of passive rental loss may be deducted if the taxpayer or spouse actively participates.
- Full allowance if MAGI ≤ $100,000
- Phased out at 50% between $100,000 and $150,000
- No allowance if MAGI ≥ $150,000
Active participation includes approving tenants, setting rental terms, and authorizing repairs.