Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.taxmap/pubs/p527-002.htm#en_us_publink100027253
If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Also, your rental expense deductions may be limited. See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). taxmap/pubs/p527-002.htm#en_us_publink100027254
If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. taxmap/pubs/p527-002.htm#en_us_publink100069579
Roger owns a one-half undivided interest in a rental house. Last year he paid $968 for necessary repairs on the property. Roger can deduct $484 (50% × $968) as a rental expense. He is entitled to reimbursement for the remaining half from the co-owner.taxmap/pubs/p527-002.htm#en_us_publink100027255
You generally deduct your rental expenses in the year you pay them.
If you use the accrual method, see Publication 538 for more information.taxmap/pubs/p527-002.htm#en_us_publink100069580
Listed below are the most common rental expenses.
- Cleaning and maintenance.
- Legal fees.
- Local transportation expenses.
- Rental payments.
- Tax return preparation fees.
- Travel expenses.
Some of these expenses, as well as other less common ones, are discussed below.
You can begin to depreciate rental property when it is ready and available for rent. See Placed in Service under When Does Depreciation Begin and End in chapter 2.taxmap/pubs/p527-002.htm#en_us_publink100027265
If you pay an insurance premium for more than 1 year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. You cannot deduct the total premium in the year you pay it. See Publication 535, chapter 6, for information on deductible premiums.taxmap/pubs/p527-002.htm#en_us_publink100027267
You can deduct mortgage interest you pay on your rental property. Chapter 4 of Publication 535 explains mortgage interest in detail. taxmap/pubs/p527-002.htm#en_us_publink100027268
Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. However, you can amortize them over the life of the mortgage. See Publication 535, chapter 8, for information about amortization. taxmap/pubs/p527-002.htm#en_us_publink100027269
If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, Mortgage Interest Statement, or similar statement showing the interest you paid for the year. If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Attach a statement to your return showing the name and address of the other person. In the left margin of Schedule E, next to line 13, enter "See attached." taxmap/pubs/p527-002.htm#en_us_publink100027266
Generally, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. These charges are nondepreciable capital expenditures, and must be added to the basis of your property. However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. taxmap/pubs/p527-002.htm#en_us_publink100027278
You can deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property.
Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. For 2008, the standard mileage rate for each mile of business use is:
- 501/2 cents per mile for the period January 1 through June 30, 2008, and
- 581/2 cents per mile for the period July 1 through December 31, 2008.
For more information, see chapter 4 of Publication 463.
To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. In addition, you must complete Form 4562, Part V, and attach it to your tax return.
You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. taxmap/pubs/p527-002.htm#en_us_publink100027264
You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts are actually purchase contracts. If so, you cannot deduct these payments. You can recover the cost of purchased equipment through depreciation. taxmap/pubs/p527-002.htm#en_us_publink100027263
You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. taxmap/pubs/p527-002.htm#en_us_publink100027280
You can deduct, as a rental expense, the part of tax return preparation fees you paid to prepare Schedule E, Part I. For example, on your 2008 Schedule E you can deduct fees paid in 2008 to prepare Part I of your 2007 Schedule E. You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. taxmap/pubs/p527-002.htm#en_us_publink100027276
You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and nonrental activities. You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. The cost of improvements is recovered by taking depreciation. For information on travel expenses, see chapter 1 of Publication 463.
To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463.
If you are a cash basis taxpayer, do not deduct uncollected rent. Because you have not included it in your income, it is not deductible.
If you use an accrual method, report income when you earn it. If you are unable to collect the rent, you may be able to deduct it as a business bad debt. See chapter 10 of Publication 535 for more information about business bad debts.taxmap/pubs/p527-002.htm#en_us_publink100027257
If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct any loss of rental income for the period the property is vacant. taxmap/pubs/p527-002.htm#en_us_publink100069581
If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. taxmap/pubs/p527-002.htm#en_us_publink100069582
The term "points" is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. These charges are also called loan origination fees, maximum loan charges, or premium charges. Any of these charges (points) that are solely for the use of money are interest. Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan.
The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. In this case, points are equivalent to OID, which is the difference between:
- The amount borrowed (redemption price at maturity, or principal), and
- The proceeds (issue price).
The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. taxmap/pubs/p527-002.htm#en_us_publink100069583
The OID is de minimis if it is less than one-fourth of 1% (.0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan).
If the OID is de minimis
, you can choose one of the following ways to figure the amount you can deduct each year.
- On a constant-yield basis over the term of the loan.
- On a straight line basis over the term of the loan.
- In proportion to stated interest payments.
- In its entirety at maturity of the loan.
You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued.
Carol Madison took out a $100,000 mortgage loan on January 1, 2008, to buy a house she will use as a rental during 2008. The loan is to be repaid over 30 years. During 2008 Carol paid $10,000 of mortgage interest (stated interest) to the lender. When the loan was made, she paid $1,500 in points to the lender. The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Carol determines that the points (OID) she paid are de minimis
based on the following computation.
|Redemption price at maturity (principal amount of the loan)||$100,000|
|Multiplied by: The term of the |
loan in complete years
|Multiplied by||× .0025|
|De minimis amount||$ 7,500|
The points (OID) she paid ($1,500) are less than the de minimis
amount ($7,500). Therefore, Carol has de minimis
OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Under the straight line method, she can deduct $50 each year for 30 years.
If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year.
You figure your deduction for the first year in the following manner.
- Determine the issue price of the loan. If you paid points on the loan, the issue price generally is the difference between the principal and the points.
- Multiply the result in (1) by the yield to maturity (defined below).
- Subtract any qualified stated interest payments (defined below) from the result in (2). This is the OID you can deduct in the first year.
This rate is generally shown in the literature you receive from your lender. If you do not have this information, consult your lender or tax advisor. In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. taxmap/pubs/p527-002.htm#en_us_publink100069586
In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. taxmap/pubs/p527-002.htm#en_us_publink100027274
The facts are the same as in the previous example. The yield to maturity on Carol's loan is 10.2467%, compounded annually.
She figured the amount of points (OID) she could deduct in 2008 as follows.
|Principal amount of the loan||$100,000|
|Minus: Points (OID)||– 1,500|
|Issue price of the loan||$ 98,500|
|Multiplied by: YTM||× .102467|
|Minus: QSI||– 10,000|
|Points (OID) deductible in 2008||$ 93|
To figure your deduction in any subsequent year, you start with the adjusted issue price. To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Then follow steps (2) and (3) above. taxmap/pubs/p527-002.htm#en_us_publink100069588
Carol figured the deduction for 2009 as follows.
|Plus: Points (OID) deducted |
|Adjusted issue price||$98,593|
|Multiplied by: YTM||× .102467|
|Minus: QSI||– 10,000|
|Points (OID) deductible in 2009||$ 103|
If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan.taxmap/pubs/p527-002.htm#en_us_publink100069590
You can deduct the cost of repairs to your rental property, but you cannot deduct the cost of improvements. The cost of improvements is recovered by taking depreciation (see chapter 2). taxmap/pubs/p527-002.htm#en_us_publink100027283
A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs.
If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. taxmap/pubs/p527-002.htm#en_us_publink100069591
An improvement adds to the value of property, prolongs its useful life, or adapts it to new uses. Table 1-1 shows examples of many improvements.
If you make an improvement to property, the cost of the improvement must be capitalized. The capitalized cost can generally be depreciated as if the improvement were separate property. taxmap/pubs/p527-002.htm#en_us_publink100027284
You repair a small section on one corner of the roof of a rental house. You deduct the cost of the repair as a rental expense. However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. You depreciate the cost of the new roof.
Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements when you sell or depreciate your property.
Table 1-1. Examples of Improvements Caution. Work you do (or have done) on your home that does not add much to either the value or the life of the property, but rather keeps the property in good condition, is considered a repair, not an improvement.
Lawn & Grounds
Storm windows, doors
Heating & Air Conditioning
Central air conditioning
Soft water system
Pipes, duct work