Rental income is generally taxable, and allowable rental expenses reduce that income. The result is either a rental gain or a rental loss. Most rental real estate is reported on Schedule E, unless the taxpayer provides substantial services, in which case the activity may belong on Schedule C.
Substantial services include daily cleaning, linen changes, or maid service. Basic services—heat, electricity, trash removal—do not qualify.
Personal Use Property
The IRS treats a rental property as a home if personal use exceeds:
- 14 days, or
- 10% of days rented at fair rental value, whichever is greater.
Personal use rules
- Not a home → report all rental income and deduct all rental expenses; losses allowed.
- Used as a home → rules depend on rental days:
- Rented < 15 days → exclude all rental income; no rental deductions.
- Rented ≥ 15 days → include all rental income; allocate expenses between rental and personal use.
Personal use includes:
- Use by the owner
- Use by family members
- Use by anyone paying less than fair rental value
Days available but not rented are not rental days.
Rental Income
Rental income includes:
- Advance rent — taxable when received
- Security deposits
- Not income if refundable
- Taxable if kept or applied as rent
- Tenant‑paid expenses — treated as rental income
- Property or services received instead of rent — include fair market value
- Personal property rentals
- Business → Schedule C
- Not a business → Schedule 1 (income and adjustments)
Rental Expenses
Deductible expenses include:
- Advertising
- Cleaning and maintenance
- Utilities
- Taxes
- Interest
- Commissions
- Travel and transportation
Insurance
Premiums paid more than 12 months in advance must be prorated.
Depreciation
- Residential rental property → 27.5 years
- Nonresidential property → 39 years
- Land is not depreciable
Repairs vs. Improvements
- Repairs — deductible; keep property in good condition
- Improvements — must be capitalized and depreciated
- Examples: new roof, added rooms, new wiring, plumbing, cabinets
De Minimis Safe Harbor
- Deduct items costing < $2,500 per invoice
- Taxpayers with an AFS may deduct < $5,000
Building Systems Requiring Capitalization
HVAC, plumbing, electrical, escalators, elevators, fire protection, security, gas distribution.
Additional Considerations
Local Benefit Taxes
Charges for improvements (streets, sidewalks, water/sewer) are capitalized, not deducted.
Vacant Property
Expenses for maintaining property held for rent remain deductible.
Uncollected Rent
- Cash method → not deductible
- Accrual method → may be deductible as a bad debt
Not Rented for Profit
Expenses limited to rental income; no loss allowed.
Property Converted to Rental
Allocate expenses between rental and personal use. No depreciation during personal use.
Renting Part of a Property
Allocate expenses between rental and personal portions. Depreciate only the rental portion.
Limits on Rental Losses
Losses may be limited by:
- At‑risk rules
- Loss allowed only to the extent the taxpayer is at risk
- Passive activity rules
- Rental real estate is generally passive
- Loss allowed 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 offset nonpassive income if:
- Taxpayer actively participates
- MAGI ≤ $100,000
- Phaseout: reduced by 50% of MAGI over $100,000
- Eliminated at MAGI ≥ $150,000
MAGI Adjustments
MAGI excludes:
- Taxable Social Security
- IRA deductions
- Savings bond interest exclusion
- Adoption benefits
- Passive income/loss
- Real estate professional losses
- Publicly traded partnership losses
- SE tax and student loan interest deductions