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A Guide to Rental Property Income Taxes

Do you have any real estate to rent out? These properties have the potential for constant income and capital growth. Your income and losses are determined according to various factors here. The type of investor you are affects your classification. Individuals usually rent out their properties for additional income. Different rental income tax rules are available depending on the taxpayers. So, the rental income is taxable, and the IRS wants people to know its details. Income tax is essential because inadvertence can lead to consequences like punishment and jail. Keep reading for comprehensive information about this crucial topic.

What Does Residential Rental Property Include?

It can involve a single apartment, home, mobile home, or similar things. These types of properties are considered dwellings. Taxpayers can utilize more than one dwelling as a residence within the year. A dwelling is considered a residence if it is used for personal purposes during the year for more than two weeks. If the dwelling is rented to others at a fair value for 10 percent of the year, it will also be considered a residence. Talking about personal use does not include the repair and maintenance time if this process is done full-time.

Different Kinds of Rental Income

Rental income can involve the following cases:

  • Rent payments that are not abnormal

  • Advanced rent payments

  • Payments that are made for canceling a lease

  • The money spent by the tenant

The security deposit is not included in rental income if the taxpayer is supposed to return it to the tenant. But if the taxpayer keeps some of the deposit due to the inability of the tenant to live up to the conditions of the lease, the amount will be considered rental income for that year. So, there are so many details to consider here.

A couple are renting a house in Bronx, New York

Rental Costs and Deductions

If the taxpayers use the dwelling they rent for personal purposes, the expenses between rental and personal use must be divided. Sometimes, a dwelling is not considered a residence; in this case, the expenses must be divided as well. They might reduce rental costs on Form 1040. Itemizing the deductions is recommended because taxpayers can deduct some of their expenses. Don’t forget that the taxpayer can deduct a limited rental cost if the dwelling is referred to as a residence. Visit Publication 527 for further information regarding the issue.

The ordinary and required expenses for managing and keeping your rental property are deductible. Ordinary expenses are evident, and they are also accepted in the business. Necessary expenditures include insurance, utilities, advertising, and so on. If the tenant pays some expenses, they are usually deductible as rental expenses.

If you pay for improvement or change the property to a better condition, the expenses won’t be deductible. The taxpayer will retrieve these expenses through depreciation. Form 4562 is the answer to resolving this issue, and taxpayers can report the added improvements. Only a percentage of costs is deductible within a year. For further information about enhancements, visit

The recovery period for residential rental property is usually 27.5 years. The alternative depreciation system has changed from 40 to 30 years. These changes are applicable for years after December 2017.

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Specific Rules

If you rent out a dwelling considered a residence for fewer than 15 days within the year, some specific rules are applied. In this case, the taxpayers won’t report the rental income, and the rental expenses are not deductible. If you are interested in this topic and want further information, Publication 527 can clarify more details.

How to Report Rental Income?

The rental income is required to be mentioned in the tax return in most cases. Schedule E (Form 1040) is the method to report the rental income and its specific expenses. Taxpayers sometimes have losses when renting out their properties. In this case, they can report the losses. Some losses are deductible, and some of them are not because the rules are different. The rules will tell us if we can reduce the losses or not. Publication 925 or Publication 527 can be insightful for further information on the issue.

A tax expert explaining rental property taxes in Bronx New York

The Rules of Condominiums and Cooperatives

There are particular rules for rental condominiums and cooperatives. In the case of a condominium, some dues and assessments must be paid to keep the common areas. When a taxpayer rents out a condominium, some expenses like depreciation and repairs are deductible. In the case of a single-family rental, the cost of capital improvements won’t be deductible. These are vital points to keep in mind.

The cooperatives are a bit different. Expenses for these kinds of apartments are deductible. It involves the maintenance fees that you pay to the housing corporation. The rules for capital improvements are different here. These costs are not deductible, and you cannot depreciate them. The cost of the improvement will be added to the cost basis here, and it causes a reduction of capital gain after the sale.

1031 Exchange and Its Use

If you finally sell the rental property, taxes for capital gains or depreciation recapture are waiting for you. Many investors postpone these types of taxes through the 1031 Exchange. It will allow you to swap one investment property for another. The nature or character of the exchanged properties must be the same, according to the statements from the IRS. Properties are like-kind, no matter whether they are improved or not. So, pay attention that 1031 Exchange is not for properties of different nature.

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For your free consultation about rental property taxes with one of our tax professionals, give our tax office a phone call at +1-347-305-4348 or write us an email using contact form below.

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