Many people with second properties find themselves becoming "accidental landlords" when they rent out these homes or condos to others at various points of the year. The Internal Revenue Service has specific guidelines that govern how often and the length of time in which homeowners may rent out their properties before being classified as a landlord, a title that greatly impacts a person's tax liability.
Individuals who use their primary or second home as a personal residence for most of the year may not be considered landlords. The IRS considers a home to be a "personal" residence if people use it for personal purposes for a certain amount of time during the tax year. In order to be considered a personal residence, rather than rental property, owners must use it for more than the greater of 14 days or 10 percent of the total days it is rented to others. Also, if owners only rent out a second or primary home for 14 days or less, they do not have to report the rent they received to the IRS. However, for those who regularly rent out their homes to make money, the end of the year may be the perfect time to gather up all expense statements and book an appointment with a tax preparer
. Landlords must report rental properties on their federal income taxes, but they may claim several deductions for expenses incurred through the year.Typical rental costs that landlords can write off
There are a number of expenses that may be deducted on a person's taxes to help them lower their liability. These include mortgage interest, points, HOA fees, property taxes and insurance. Landlords may also deduct the cost of cleaning and maintenance, utilities, repairs and management and legal fees. Another important deduction relates to the depreciation of the property.
To calculate the depreciation, landlords must determine the tax basis and depreciable basis of their property. The tax basis is the smaller of the amount paid when a person purchased the property, plus any capital improvements that were made over the years or the FMV at the time of the conversion. This figure is then split into land value and building value to get the depreciable basis. Finally, the deduction can be calculated by dividing the building value by 27.5 years. Landlords are highly encouraged to consult a tax professional to help calculate these figures and avoid costly mistakes.
This information must be filled out on IRS 1040 Form Schedule E - Supplemental Income and Loss From Real Estate.
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