Rental Expenses

Rental Expenses

Some examples of expenses that may be deducted from your total rental income are depreciation, repairs, and operating expenses. You can recover some or all of your original investment in the rental property (including furnishings) and the cost of later improvements through depreciation. You must use Form 4562 (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make an improvement or add furnishings. For information on depreciation, refer to Publication 946, How To Depreciate Property. The cost of repairs may be deducted in full in the year paid. If you personally repair something on your rental property, you may not deduct the value of your own labor. Only out-of-pocket repair costs, such as materials, are deductible.

For a discussion of the difference between repairs and improvements, refer to Publication 527, Residential Rental Property (Including Rental of Vacation Homes). Other rental expenses you may deduct include advertising, fire and liability insurance, taxes, interest, and commissions paid for the collection of rent.

If you rent only a part of your property, you must divide the expenses between the part used for rental purposes and the part used for other purposes. You may use any reasonable method for dividing the expenses, but a method based on square footage is usually the most accurate.

There are special rules relating to the rental of real property that you also use as your main home or your vacation home. For information on income from these rentals, or from renting at an amount less than the fair market value, refer to Renting Residential and Vacation Property, Renting Residential and Vacation Property (formerly Renting Vacation Property and Renting to Relative).

If you do not use the rental property as a home and you are renting to make a profit, your deductible rental expenses can be more than your gross rental income, subject to certain limits. For information on these limitations, refer to Passive Activities – Losses and Credits, Passive Activities – Losses and Credits.

For more information on rental income and expenses, including passive activity loss limits, refer to Publication 527.


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