Rental Property

Two weeks ago, I worked on a return for a tax client who owned real estate.  She owned a 4 unit apartment building.  She lived in one of the units and rented out the other 3 units.  One of the uses of Schedule E is to report income and expenses related to renal property.

This week, I worked on a tax client that had quite a complicated return.  Part of the complication had to do with the fact that she had a property that she owned and rented out to a relative.  In order to let the IRS know about any rental income, a Schedule E is the form that you need to file with the IRS in order to report it.

Here is a link to the tax form we will be talking about, the schedule E:   IRS Form Schedule E

On a Schedule E, You list the address of up to three properties that you own.  You list the type of rental property, the rental days and personal use days during the year.  Personal use days are days that you use the property for your personal use.  The other days are known as rental days.  You can only deduct expenses for the percentage of the year that the rental property was available for rent.  You then list the rental income.  You then list the expenses that you had for the rental unit.  These are listed on the Schedule E, but I thought I would highlight some of the more popular.  Note that these costs start the day you convert this to a rental property.  This means when you start to offer the unit to the public as available to rent.

Advertising - this includes any costs associated with renting the unit, whether or not they were successful.  Auto and Travel - this can be any mileage or travel associated with collecting rent or showing the property.  It actually can be very lucrative as it is at 57.5 cents per mile.  Mortgage Interest - this is the amount of interest you pay to your bank.  Taxes - This is any taxes associated with the property and is usually Property taxes.  Utilities - these are any costs for utilities that you do not pass onto your tenant.  Management Fees - these are costs that you have to pay in order for your property to be managed.


If you fix something within your building, you need to decide whether it was a repair or it was an improvement.  A Repair can be deducted in one year.  An improvement can be depreciated over 27.5 years.  The IRS has said that improvements are anything that undergoes either a betterment, adaption or restoration.  If you are repairing normal wear and tear to a building, it is a repair.  But if you are making a major improvement and increasing the resale value, you need to classify this as an improvement.  Improvements increase the basis of a property.  The basis is basically what you bought the property for plus any improvements less the depreciation of a property.  Another related expense is depreciation.  You can depreciate the purchase of the building and any improvements.  You need to consider when they were done and depreciate them over 27.5 years.  This is a major write off so it is important to keep good accounting records regarding improvements.

Some advantages of having a rental property are that this is money that you have received.  You can reduce your income on such schedule a deductions as mortgage interest, travel and property taxes without having to have your deductions together be more than the standard deduction.  You also can have your standard deduction on the 1040 and have the ability to reduce your income on the schedule e.  In otherwords you can have both.