Rental Expenses – What is Deductible?

DISCLOSURE & ACKNOWLEDGMENT REGARDING RENTAL EXPENSES

This disclosure is provided for you in order to clarify what expenses may be taken in connection with your rental property.

Rental Expenses – General Overview

To be deductible, a rental expense must be both ordinary and necessary. An expense does not need to be indispensable to be considered necessary. An expense must also not be a personal expense (unrelated to the rental property). If you have expenses that relate to both personal activities and rental activities, you must make an allocation and be prepared to support the allocation under IRS audit.

Business expenses may include:

  • Advertising
  • Cleaning and maintenance
  • Utilities
  • Insurance
  • Taxes
  • Interest
  • Points
  • Commissions
  • Tax return preparation fees
  • Travel expenses
  • Rental payments
  • Local transportation expenses

Generally, in the event of an audit, you will be required to provide written support for all expenses listed.

Record-Keeping and Transactions

In order to assist with record-keeping and IRS compliance, we recommend your rental properties have their own bank accounts and that all rental-related transactions be run through said accounts. We also recommend that there be no commingling of funds (in other words, don’t pay for personal items with the rental bank account). This helps to establish that the property is being run like a business, minimizing disallowed expenses in the event of an IRS audit.

Repairs and Improvements

You can deduct the cost of repairs to your rental property. You cannot deduct the cost of improvements. You recover the cost of improvements by taking depreciation.

Repairs: A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Examples of repairs include:

  • Repainting (both inside and outside)
  • Fixing gutters or floors
  • Fixing leaks
  • Plastering
  • Replacing broken windows

Improvements: An improvement adds to the value of the property, prolongs its useful life, or adapts it to new uses. If you make an improvement to property, the cost of the improvement must be capitalized. The capitalized cost can generally be depreciated as if the improvement were separate property. If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. Examples of improvements include:

  • Additions (bedrooms, bathrooms, deck, garage, etc.)
  • Lawn & Grounds (landscaping, driveways, walkways, fences, sprinkler system, pool)
  • Heating & Air Conditioning
  • Plumbing (septic, water heater, soft water, filtration)
  • Interior Improvements (Built-in appliances, kitchen modernization, flooring, wall-to-wall carpeting)
  • Insulation
  • Miscellaneous (storm windows, new roof, central vacuum, wiring upgrades, satellite dish, security system)

Limits on Rental Losses

Rental real estate activities are generally considered passive activities, and the amount of loss you can deduct is limited. Generally, you cannot deduct losses from rental real estate activities unless you have income from other passive activities. However, you may be able to deduct rental losses without regard to whether you have income from other passive activities if you “materially” or “actively” participated in your rental activity.

Personal Use of Dwelling Unit (Including Vacation Home)

If you have any personal use of the dwelling unit that you rent, you must divide your expenses between rental use and personal use. Please contact our office to discuss potential limitations.

Summary

We recommend you always run your rental property like a business. Keep adequate records and make sure any licensing requirements are kept current.

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