You have spent all year making sure your rental property has been properly maintained and that your tenants are happy. This comes at a cost and as tax season approaches its time to figure out which of these expenses can be claimed to reduce your taxes.
Keep in mind this applies whether you rent out a whole property or just one or more rooms in your home. In the situation where you are renting out part of your home, any costs which are directly related to the rental portion of your home will be 100% deductible, and costs which relate to the whole building, such as property taxes and insurance, would only be partially deductible. The expenses can be split using floor area or the number of rooms that you are renting, as long as the split is reasonable.
Deductible expenses include:
- mortgage interest (but not principal),
- property taxes,
- utility costs,
- house insurance,
- maintenance costs, (one exception to this is if a repair was made to help sell the house, which would be capitalized and not expensed)
- advertising, and
- property management fees
Some examples of expenses that are not deductible include:
- If you have just acquired the rental property, any upgrades that are put in to make the property rentable would be capitalized
- If items (for example, toilets and sinks) are replaced to upgrade to something of better quality or performance, not because of wear and tear, this would be capitalized
- If something is acquired that has a lasting nature and doesn’t have to be replaced in a short span (for example, vinyl siding) this would be capitalized.
It is also worth noting that rental losses can be used to offset other income. If it can’t be used in the current year it can be used it future years.
One last note, a change in use of your home from personal residence to rental property, or from rental property to personal residence, can result in a deemed disposition for tax purposes. This means that you will be considered to have sold your home and repurchased it immediately thereafter for fair market value. When making a change like this there are many factors which need to be considered and professional advice is recommended.
If you have questions about your rental property or if you require more information, please contact Iqbal Shanghera at Iqbalshanghera@tsascpa.com.