While landlords must pay income taxes on net rental income, they're rewarded with a variety of potential tax deductions. Landlords who rent out a room in their personal residence can also take advantage of tax deductions, but the amount is limited. Basic rental expenses, travel and depreciation are common tax write-offs.
Renting a Property vs. Renting a Room
Whether you rent out an entire property or a room in your personal residence, you're entitled to some deductions. The main difference is the amount you can deduct. For a rental property, landlords can deduct the full amount of rental expenses incurred to rent the home. When renting a room, you'll have to prorate some expenses. You can write off any costs you incur just for the room, like painting the room or replacing a door. But expenses that benefit the whole house, like roof repairs, mortgage interest, homeowners insurance and utilities, must be prorated based on the square footage of the room. For example, if the room's square footage represents one quarter of the entire home, you can write off 25 percent of shared expenses.
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Vacation Homes and Partial Rentals
You may be able to claim rental deductions for vacation homes and partial rentals, but only under certain conditions. For a property to qualify as rental property, your personal use of the home can't exceed 10 percent of the property rental days or 14 days a year, whichever is greater. This means that if a property is rented for six months out of the year, you can use it for up to 18 days (30 days multiplied by six multiplied by 10 percent) and still consider it a rental for tax purposes. You must prorate all rental expenses based on how many days the property was rented for business relative to the total days it was used. For example, if the home was rented for 180 days and you lived in it for an additional 18 days, you can deduct 91 percent of the annual expenses (180 divided by 198).
Basic Rental Expenses
Renting out a home or room essentially requires you to run your own business, so you can deduct all the ordinary and necessary expenses involved in maintaining the area and finding tenants. Rental expenses are deductible whether the rental is occupied or vacant. Any expenses for you to advertise, clean and repair the rental are deductible. Insurance, utilities, homeowner fees, local property taxes, mortgage interest expense and any legal fees are all deductible as well.
Any trips made for a rental activity can result in a tax deduction. For example, driving out to address an employee complaint, to show the property to prospective tenants or to perform routine maintenance are all valid business trips. When using your own car, you may deduct the IRS standard mileage rate, which is 56 cents per mile as of this publication. If your rental is remote, you can deduct the cost of airfare, trains and even hotels and meals. However, to deduct long-distance travel expenses, you must spend more than half your time on rental activities during the trip.
While you can't immediately write off the cost of a rental property that you purchase, you can get your money back through depreciation expense. To depreciate your rental property, you need to know your basis. For rental property, the basis is the lower of original purchase price or the fair market value of the property when you converted it into a rental. Landlords who rent out a room in their home may also claim a portion of depreciation expense.