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Rental Real Estate
- If you rent your home or vacation home for 14 days or less, you don't need to report your rental income on your tax return.
- You can deduct expenses for your rental home on your return even if you don't have tenants as long as you are actively seeking tenants. One way to document that you are actively seeking tenants is to clip out and save an ad in the newspaper showing that your rental home is available
- You can deduct up to $25,000 of rental losses on your tax return if your adjusted gross income is less than $150,000. If you are renting to a family member, you can deduct your rental loss if the family member is paying a fair rental price and uses the home as their principal residence.
- You are not limited to $25,000 in rental losses on your tax return if you are a real estate professional. If you spend more than one half of any job or business related time doing your real estate business and spend more than 750 hours on your real estate business, then you are a real estate professional. EXAMPLE: You own 10 rental houses for which you personally spend 1,350 hours during the year doing work related to those homes. You are also a school teacher and spend 1,300 hours during the year in the class room. Since more than half of your professional time is spent on your real estate business and you meet the 750 hours test, you are a real estate professional.
- If your rental property is damaged by vandalism, the repair costs to restore the property to its previous condition are deductible as repair and maintenance costs instead of being capitalized and depreciated.
- Always take depreciation on your rental home. Some people don't want to bother taking depreciation on their home if they are planning to rent their home for a year or two before returning and making the home their principal residence again. However, the IRS considers depreciation to be taken on your rental home for the period it was rented whether or not you take the depreciation on your tax return. So when you eventually sell the home, gain needs to be recognized to the extent of any depreciation taken (or what should have been taken).
- Gain on the sale of your principal residence is excluded from taxable income if you have lived in the home for two out of the past five years. If you have a rental property (or vacation home) that has significantly appreciated since you purchased it, you could move into the rental home and use it as your principal residence for two years, then sell it and have the gain on sale of home exclusion apply. However, you would still have to recognize gain on any depreciation taken on your tax returns after May 6, 1997.
