If you own rental property, you are responsible for paying taxes on the rental income you receive. You may also be able to deduct certain expenses related to the rental property, such as mortgage interest, property taxes, and depreciation.
The amount of taxes you owe and the expenses you can deduct will depend on several factors, including how you use the property and how much you rent it out.
Rental Income and Expenses
The first step in determining your tax liability for rental property is to calculate your rental income and expenses. Rental income is the amount of money you receive from renting out the property. Expenses include mortgage interest, property taxes, insurance, repairs and maintenance, utilities, and depreciation.
Depreciation
Depreciation is a deduction that allows you to recover the cost of your rental property over some time. The amount of depreciation you can deduct each year depends on the type of property and the depreciation method you use.
Personal Use
If you use the property for personal purposes, you need to divide your expenses between rental and personal use. You can only deduct the expenses that are related to the rental use.
Passive Activity Loss Rules
If you have other sources of income, such as a job or a business, the rental income and expenses may be subject to the passive activity loss rules. These rules limit the amount of losses you can deduct from your other income.
Reporting Rental Income and Expenses
You must report your rental income and expenses on your tax return. You will generally report this information on Schedule E (Form 1040).
IRS Publication 527
For more information on rental property taxes and expenses, please refer to IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes). This publication can be found on the IRS website.
