A Practical Guide to US Rental Income Taxation: Expense Claims for Rental Properties

Although tax refund claim filing system has been open for filing via mail from January 1, 2019, you as a rental property owner are most likely to not to delay your refunds for 8 weeks just by filing it earlier via postal mail. We, along with IRS, suggest you to e-file all income and loss statements on April 15 instead. As every year, there are tax deductions available for you, no matter if you are a rental property owner claiming your rental income, or you are filing an income report on your income from your own personal residence.

To help you out with filing the tax deduction forms, we are going to explain just what can be deducted, from which income, and what are the limitations and forms to be filled in by the Tax Day 2019.

Rental Properties: What Is Taxed and What’s Not

To shine a light on what exactly classifies as a rental property, we are going to remind you of both classifications, as well as statuses of rental activity.

A personal residence is one which is rented out for no more than 14 days or 10% of the total time of your time in the property, whichever is greater. Rental property, on the other hand, has exceeded the previously mentioned rental cut-off and classifies as a property mainly used for further renting. Both are taxed, and you shall claim your rental income using Tax form. You only have to report your income and loss on the previously mentioned property types via Schedule E from Form 1040. The tax-free rental, which is rented out or booked for 14 days or less, does not require an income claim.

What Income is Taxed

Income of the rental property is most likely to be the total booking price your guests pay to you. Rent income need to be reported, as well as any other payments, such as advance payments. Advance payments may include pre-payment or security deposits which are kept after the guests are already checked out. In any case, all the income shall be reported and accounted for.

What Losses Can Be Deducted

As for tax deductions, it is in your advantage to deduct rental expenses and losses from your rental income. These expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs, both ordinary and necessary expenses.. You are not entitled to deduct expenses associated with improvements, such as construction works, but you can recover some of those using the tax form No. 4562.

What Form Shall I Use

All income and losses are reported on Form 1040, Schedule E, Part I.  However, in a case with 3 or more rental properties, you must fill in as many E schedules as needed, only skipping the Total part on parts after the first filled form. In case your properties qualifying for residential rental property, you may have a look at Publication No. 527 for tax deductions instead, whereas to gain more information on rental property in use in general, you may consult Publication No. 415.

Conditions and Limitations

You must note that the limitations for tax deductions are subjected to the status of the rental business activity. You can consult the limitations in detail on Form 8582, Passive Activity Loss Limitations, and Form 6198, At-Risk Limitations, or alternatively skim through the main points in the following paragraph.

If your rental activity can be described as an actively participating in business, namely making decisions on whom to allow to book your property, taking care of maintenance and terms of a lease, then the loss from your rental properties can be netted over losses and incomes of your other properties.

If you, just like most CuddlyNest hosts are taking the passive route, then your losses can be deducted in a maximum of $25.000. However, if the loss exceeds the limit, it can be carried over to the next year.

All in all, there are some points you need to consider before filing the Form 1040, Schedule E and reporting your rental income and loss for the tax year 2018. First of all, you must know in which class your property falls into to know if you need to claim your income at all. Secondly, you shall determine the status of your business activity, account for all income, and them for all losses, according to Schedule E, and limitations imposed by active or passive participation in a rental business activity.

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