Rental Real Estate
How is rental income taxed?
You are taxed on the amount of rental income that exceeds your related expenses, including
depreciation. If your expenses are greater than the rents you receive, you have a loss. There are special
rules related to expenses of property used partly for business and partly for personal purposes. There are also
special rules called "passive activity loss rules" which may limit the amount of the loss you can claim.
How to report rental income?
Report rental income in the year you actually or constructively receive it. You constructively
receive income when it is made available to you, as when it is credited to your bank account.
You generally deduct ordinary and necessary rental expenses in the year you pay or incur them.
If you hold property for rental purposes, you may be able to deduct expenses for managing, conserving, or
maintaining the property while the property is vacant. You can deduct ordinary and necessary pre rental expenses
from the time you make the property available for rent. If you sell property held for rent, you can deduct these
expenses until the property is sold.
What rental losses cannot be deducted?
However, you cannot deduct any loss of rental income while the property is vacant.
You cannot deduct as an expense rents that your tenants did not pay you.
Using rental real estate for personal use
If you sometimes use your property for personal purposes, you must divide your expenses between
rental and personal use. Also your rental deductions may be limited.