Understanding Rental Income & Tax Deductions

Tax time can be tedious and tricky for most of us, especially if you own a vacation rental home. While some rules and regulations are clearly stated, others are not so much. We are certainly NOT tax experts, but we thought it would be nice to review some of what we do know about rental property record keeping.

Rental Income Overview

To start, you should know that all rental income must be reported on your tax return; and, for the most part, the expenses of managing your property can be deducted from your rental income. 

Since most people operate on a cash basis method, as a homeowner, you will report all rental income on the return for the year you actually receive it. In the same way, you will deduct your rental expenses in the year you pay them. 

So, what counts as rental income? Besides the obvious rent checks received by tenants, rental income can also include advanced rent, security deposits, payments for breaking a lease, expenses paid by tenants, and/or services received as a form of payment. Of course, there are many different situations that come with each of these, so it’s best to check the IRS website for more information on each. 

Tax Deductions For Rental Homes

When you have finished reporting all of your rental income, it’s time to move on to deductions. Wooo-who! 

What can you deduct? In general, you can deduct rental home expenses such as mortgage interest, property tax, home repairs, depreciation, and other operating expenses. The most commonly confused deduction is usually home repairs versus home improvements. Where the cost of supplies, materials, maintenance, and repairs CAN be deducted, costs associated with home improvements CANNOT. 

For example, replacing one broken or leaking window is considered a repair, but if you were to replace all of your home’s windows with new impact-resistant windows, this is considered an improvement. You can, however, recover some of your home improvement costs by reporting depreciation using Form 4562. Refer to the IRS guidelines and/or your financial advisor to better understand your specific circumstances. 

Record Keeping 

Maintaining good records is important, especially if your tax return is selected by the IRS for an audit. Not providing evidence to support your income and/or deductions can result in additional tax penalties, so make sure your books are up to date! 

Helpful Tax Links

Tips on Rental Real Estate Income, Deductions and Recordkeeping - IRS 

Real Estate Tax and Rental Property - TurboTax

Tax Deductions for Rental Homes - HouseLogic