Rental Property Tax Issues

A real estate professional is allowed to claim rental losses against all income, which may include acquisition, construction, management and property development. Deductions are available to reduce the income tax on profits for career real estate professionals also. A passive investor is not allowed the same tax credits that a professional is allowed. The following rental property tax issue guidelines should prove helpful.

• Deductions for Mortgage Payments – Expenses such as commissions and appraisals are deductible over the life of the mortgage, but not in the year they are paid. The principal of the mortgage is not deductible; however, the interest reported on Form 1098 may be deductible.


• Expenses Paid by Tenant – If a tenant pays for a repair, it is considered taxable income, unless the tenant is reimbursed; however, the repair may be deducted as a rental expense.


• Miscellaneous Tax Deductions – Insurance, lawn maintenance, losses, preparation fees charged by an accountant and taxes may be included with tax deductions.


• Rental Income – Advance payments must be counted as income in the year that it is received, not when it was actually due.


• Repair Deductions – Repairs are tax deductible on rental property in the year that the owner pays for the repair, but not improvements. Improvements may be depreciated over the life expectancy of the property.


• Security Deposits – A security deposit is not considered taxable income, if the money is to be returned at the end of the lease. If the renter damages the property and the lease money is retained for repairs, the security deposit must be counted as income, but it can also be counted as a deductible expense. 


• Tenant Services Exchanged in Lieu of Rent – Services provided by the tenant must be counted at fair market value, but they may be deducted as an expense.