06 / 01 / 17

Tax Implications of Rental Properties

Written By: Jessica Thibodeaux

It’s Summertime, and as we flock to seaside destinations for a week at the beach, many of us often consider whether BUYING a beach house would be smarter than RENTING one once or twice a year. Here are a few tax implications of owning a beachside rental property.

  • Rental income is “any payment you receive for the use or occupation of the property.”
  • You report your rental income on a Schedule E with your Form 1040 Income Tax Return.
  • Vacation homes are subject to the 14 day or 10% rule. You can rent your vacation home for under 14 days without being required to report the income on your tax return/allowed to deduct relevant expenses. However, if this is a true rental property, you can use the property for 14 days per year or 10% of the total time rented (whichever is less) without having to allocate deductions/limit your deductions to rental income.
  • Rental income is usually classified as a passive activity, meaning if you have a loss on your rental activity, you cannot use it to offset your other taxable income, UNLESS you actively participate in the rental real estate activity. Active participation usually means you substantially own the property and make big management decisions.
  • Security deposits do not have to be included in income until you keep it. If you use it to pay repair expenses for damage, you can deduct this repair cost to offset the deposit income.
  • You can take a depreciation deduction for a percentage of your basis in the rental property each year. When you sell the property, your depreciation deductions have reduced your basis in the property, so you’ll pay taxes on any gains as well as on the depreciation deductions taken.
  • Additional deductions include advertising, cleaning, commissions, Homeowners Association fees, insurance, lawn maintenance, legal and tax preparation fees related to your rental activity, maintenance, management fees, repairs (NOT to be confused with improvements that add to the value of the property), taxes, trash removal fees, travel expenses, etc. You can deduct the costs you incur of managing and maintaining the property even when you have no tenants.
  • You can deduct the cost of traveling to your rental property if you are primarily going there to maintain the property. If you also choose to vacation while there, you must allocate travel costs between deductible business expenses and nondeductible personal expenses.