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Deduction Limits Based on Property Use

 

The use of your property determines the amount of expenses you can deduct. There are special rules if you:

  • do not rent your property for profit,
  • change the use of the property from personal use to rental use,
  • rent only part of your property, or
  • have any personal use of a vacation home or other dwelling unit that you rent out.

Not for profit rental property

If you do not rent your property for profit, you can deduct only those rental expenses that do not exceed  your rental income. You cannot carry forward any rental expenses that are more than your rental income.

Not for profit rental income is reported on line 21 of Form 1040. Do not use Schedule E. Deduct rental expenses on the appropriate lines of Schedule A if you are itemizing your deductions.

 
Property changed to rental use

If you change part or all of your home or other property to rental use after the beginning of the year, you must allocate yearly expenses such as depreciation, taxes and insurance between rental use and personal use. Your basis for depreciation must be the lesser of your adjusted cost basis or the fair market value of the property on the date your change it from personal use. Deduct as rental expenses on Schedule E only the part of the expense that is for the part of the year that property was held or used for rental purposes.

You an deduct as itemized deductions on Schedule A the interest and tax expenses for the part of the year the property was held for personal purposes. Depreciation and insurance for personal use property are not tax deductible.

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