Tax Implications of Rental Property
By: Jason Shuman, Staff Accountant
One of the more common questions we get asked leading up to and during tax season is about the reporting of rental properties. At first glance, rental property tax reporting can seem a bit complex. The purpose of this blogpost is to review base knowledge about rental property and its tax implications.
What needs to be reported on your tax return?
The information that you’ll need to keep track of throughout the year includes rental income and expenses related to the rental property. There are several expenses that are deductible. The most common expenses include advertising, insurance, repairs and utilities. In addition, any mortgage interest and property taxes related to the rental property may also be deducted. It is important to keep organized records and documentation throughout the year. Creating an excel spreadsheet can help with tracking monthly income and expenses. A little extra time spent on organizing and documenting rental records throughout the year will result in less stress around tax time and will ensure that you are minimizing your tax liability.
Categories of Rental Properties
Rental properties are typically broken down into three basic categories:
- Rental properties
- Nonreportable properties
- Mixed use rental properties
Let’s take a closer look at what defines each category to help determine how to classify your own property.
The first thing we must ask is whether your property meets the threshold to be reported on your tax return. The answer is simple for the first two categories:
- Reportable property: If the property is rented for more than 14 days, income from the property must be reported on your tax return.
- Nonreportable property: If the property is rented 14 days or less, then the property’s income does not need to be reported. This is often the case when someone rents a beach home to a friend for one week during the summer, rather than renting it out over longer periods. This is definitely important to remember as you can avoid the necessity of reporting, the possible headaches, and most importantly, the taxes, by keeping the time rented to the 14-day limit.
What if you rent and personally use the property?
Here’s where things can get a little tricky. Much like tracking the income and expenses for the property, it is important that you keep track of how many days the property is rented, and how many days the property is used for personal use.
If you limit your personal use to 14 days, or less than 10% of the total days rented, your property can be classified as a full rental property. Furthermore, you will generate a loss if your deductible expenses are more than your rental income. If you are actively involved in the management of the property, you can use this loss to offset other income on your return by up to $25,000. If you expect to have a loss on a property, it may be beneficial to limit your personal use so that you can take advantage of the loss on your current year return.
If you use the property for personal use over 14 days, or over 10% of the days rented, then it is classified as a mixed use rental property. In this instance, you can only use your expenses to offset your rental income. In addition, your deductible expenses need to be prorated based on the the number of rental and personal days.
The chart below summarizes the parameters regarding the three rental property categories:
|Category||Rental Days||Reported to IRS?||Personal Use||Expense Treatment|
|Nonreportable Rental Property||14 or less||No||N/A||N/A|
|Reportable Rental Property||Over 14||Yes||Up to 14 days or 10% of days rented||In addition to rental expenses, it may be possible to utilize rental loss to offset other income.|
|Mixed Use Rental Property||Over 14||Yes||Over 14 days or 10% of days rented||Loss cannot offset other income. Expenses prorated based on rental/personal days|
If you have any further questions regarding your rental property and the tax reporting requirements, please reach out to us and we will gladly assist you. You can also check out our Great Advice Vlog for more information.
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Jason Shuman is a staff accountant in Cover & Rossiter’s tax department. He is scheduled to graduate from West Chester University in 2021 with degrees in Accounting and White Collar Crime. Contact Jason at JShuman@CoverRossiter.com or by calling 302-656-6632 x231.