Rental real estate income is generally reported on Schedule E, unless the taxpayer provides substantial services (cleaning, linen service, daily maid service), in which case the activity is reported on Schedule C and is subject to self‑employment tax.
Personal Use Rules
Tax treatment depends on how many days the property is rented and used personally.
- Rented < 15 Days
- Do not report rental income
- Do not deduct rental expenses
- Rented ≥ 15 Days & Used as a Home
- Include all rental income
- Allocate expenses between rental and personal use
- Losses may be limited
- Not Used as a Home
- Report all rental income
- Deduct all rental expenses
- Losses allowed (subject to at‑risk and passive rules)
Personal use includes use by the owner, family, or anyone paying less than fair rental value.
Rental Income
Include all amounts received for use of property:
- Advance rent — taxable when received
- Security deposits — taxable only if kept
- Tenant‑paid expenses — included as rental income
- Property or services received — include FMV
- Personal property rentals — Schedule C if a business; otherwise report as other income
Rental Expenses
Deductible expenses include:
- Advertising
- Cleaning and maintenance
- Utilities
- Taxes and interest
- Insurance (prorate if prepaid >12 months)
- Commissions
- Travel and transportation
- Depreciation
Depreciation
- Residential rental property: 27.5 years
- Nonresidential property: 39 years
- Land is not depreciable
Repairs vs. Improvements
- Repairs: deductible (fixing leaks, repainting, patching)
- Improvements: capitalize and depreciate (new roof, wiring, additions)
De Minimis Safe Harbor
- Deduct items < $2,500 per invoice
- $5,000 threshold if the taxpayer has an AFS
Additional Rules
- Local benefit taxes (streets, sidewalks): capitalize
- Vacant property: deduct expenses while held for rent
- Uncollected rent: no deduction for cash‑basis taxpayers
- Not rented for profit: expenses limited to rental income
- Converted property: allocate expenses between rental and personal use
- Renting part of a home: allocate expenses; depreciate rental portion
Rental Loss Limitations
Losses may be limited by:
- At‑Risk Rules
Loss allowed only up to the taxpayer’s amount at‑risk (cash, basis of property contributed, certain recourse loans).
- Passive Activity Rules
Rental real estate is generally passive. Losses allowed only against passive income unless an exception applies.
Exceptions:
Real Estate Professional
- 50% of personal services in real property trades or businesses
- 750 hours of material participation
$25,000 Special Allowance
- Up to $25,000 of rental loss may offset ordinary income if the taxpayer actively participates
- Phases out between $100,000–$150,000 MAGI
- No allowance if MAGI > $150,000
Active participation includes approving tenants, rental terms, and expenditures.