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Figuring Net Income and Loss

How you figure your net rental income or loss for a dwelling unit used for both rental and personal purposes depends on whether the dwelling unit was used as a home and, if used as a home, how many days the property was rented.

Property not used as a home

If under the rules explained earlier, you do not use the dwelling unit as a home, report all the rental income and deduct all the rental expenses as your would with any rental real property. Your deductible rental expense can be more than your gross rental income subject to the loss limitations on all rental property explained later under Limits on Rental Losses.

Property used as a home

If under the rules explained above, you use the dwelling unit as a home and you rent it for fewer than 15 days during the year, do not include any of the rental income in your income for the year. Also, you cannot deduct any expenses as rental expenses.

If you use the dwelling unit as a home and rent it for 15 days or more during the year, include all rental income in your gross inocme. If you had a net profit for the year, (your rental income is more than the total of your rental expenses, including depreciation) you may deduct all your rental expenses. If you had a net loss, your deduction for certain rental expenses are limited.

Limit on deductions

You can deduct all expenses for the rental part of mortgage interest, real estate taxes, casualty losses, and direct rental expenses (expenses not related to the use of the unit as a home), such as advertising expenses and rental agent's fees. These expenses can be deducted even if they result in a net loss.

If any income is left after deducting these expenses, you can deduct other expenses up to the amount of remaining rental income. These other expenses must be deducted in a prescribed order. You first deduct the rental portion of operating expenses, such as utilities and repairs up to the amount of remaining income. If there is still income remaining, you can then deduct the rental portion of depreciation and excess casually and theft losses. You can carry over to the next year the amounts you cannot deduct. Any expenses carried forward to the next year will be subject to any limits that apply that year. You can deduct the expenses carried over to a year only up to the amount of rental income for that year even if you do not use the property as your home for that year.


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