If income is received from renting out to others, a house, an apartment or any other dwelling unit, one may deduct certain expenses. These expenses, which may include interest, taxes, casualty losses, maintenance, utilities, depreciation and insurance, will reduce the amount of rental income that is taxed. You generally report such income and expenses on Form 1040 and form 1040 schedule E respectively. If you are renting to make a profit and do not use the dwelling unit as a home, your deductible rental expenses can be more than your gross rental income, subject to certain limits.
Your rental losses however, may be limited by the “at-risk” rules and the passive activity loss rules. (IRS Publication 925.2010) However if you rent a dwelling unit that you also use as a home, your deductible rental expenses will be limited. You are considered to use a dwelling unit as a home if you use it for personal purposes during the tax year for more than the greater of 14 days or 10% of the total days it is rented to others at a fair rental price. It is possible that you will use more than one dwelling unit as a home during the year. (IRS. 2010)
For a house, property or apartment that is used for both rental and personal purposes, any expenses accrued on the same is divided between the personal use and rental use respectively based on the number of days used for each purpose. (IRS. 2010)
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Tax consequences on rental income
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In Tony Pierce’s Case, Tony has rented his vacation home for 30 days during the year and has already used it personally for 11 days in the same year. Therefore we are going to partition the expenses based on the number of days that the home have been rented out to be deducted from rental income in order to arrive at the taxable income
- IRS. (2010, March 4th). Topic 415 – Renting Residential and Vacation Property.
- Retrieved July 11th 2010 from http://www.irs.gov/taxtopics/tc415.html
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