Deductions cut tax bills.
Tax deductions for rental property require some careful analysis. When you live in the rental property for a portion of the year, it makes figuring tax deductions even more challenging. The federal government, through the Internal Revenue Service, establishes laws that determine the deductions a property owner can claim for owner-occupied property. Some rules for home ownership apply, and some rules for rental property apply, and taxpayers need to understand the factors before they rent a home or move into a home they own.
Mortgage Interest
Federal tax laws allow homeowners to deduct mortgage interest paid to a financial institution from federal income tax returns. To claim a deduction for mortgage interest, you must reside in the home and pay interest on a mortgage loan. Rental property only qualifies for this deduction if you also reside on the property. To claim the deduction, you must itemize your tax deductions. To do this, you must use Form 1040, Schedule A.
Property Taxes
Federal income tax laws allow you to deduct property taxes paid on a rental home. If you rent your home or a part of your home for 15 or more days during the tax year, you can claim this deduction from your rental income. If you do not rent the home for 15 or more days, you still can claim a property tax deduction on your income tax return. You must itemize and file Schedule A with your return in order to claim this deduction.
Rental Expenses
If you rent your home for 15 or more days during the tax year, you must report your rental income. You can claim deductions on this income for rental expenses. These expenses include depreciation, insurance premiums and home repairs. If you do not rent your home for 15 or more days, you cannot deduct any rental expenses. If an expense was partially for your own use of the home and for a renter's use, you can deduct only the portion of the expense that applied to the rental use.
Vacation Homes
Under limited circumstances, you can deduct losses on a rental home that you also used as a dwelling. To qualify for a deduction, your personal use of the home must not exceed 14 days or 10 percent of the days during which the home was rented. If the home was rented all year, you must not use the home for more than 36 days during the calendar year. This standard generally only applies to vacation homes, since a property owner would exceed the maximum for a home that served as a primary residence.
Personal Use Standard
The federal tax laws define the personal use of a dwelling unit. The home is used for personal purposes if you or a family member used the home. If you allow someone to stay at the home for less than fair rental price or under some non-monetary agreement, that also qualifies as a personal use. Therefore, the maximum of 14 days or 10 percent of the rental days includes the sum of all of these uses.
