Rental Property Tax Deductions and Limitations

There is a lot to consider when filing a proper Schedule E (Supplemental Income and Loss)  within your personal Form 1040 income tax return.

Schedule E – Rental Property Tax Deductions & Income

Many of our clients have rental property whether they initially bought it for that purpose or it was converted from a personal residence (or vacation home) because they could not profitably sell it.
If an individual owns a rental property the income and all expenses associated with that property should be reported on a schedule E which is included in their individual income tax form 1040. The expenses that are reported on schedule E include the normal operating expenses that the owner pays and depreciation. Depreciation is calculated annually by taking the basis less land value of the property and following a schedule which spreads the cost over 27.5 years for residential and 39 years for a commercial property.

Passive Activity Limits Rental Property Tax Deductions

Almost all rental activity by definition is a passive activity which is an important term. The result of the rental operations on form schedule E within the 1040 will produce a passive activity result which is either net income or a net loss. If there is an income this is added to your other taxable income less your normal deductions and you pay tax based on the tax bracket you’re in. If you have a loss from a rental activity, complications arise due to the passive activity loss limitations which were passed into law in 1986. The law states that you cannot deduct losses from passive activities in excess of other passive income and must be carried forward to future years using certain allocations. There is an exception to the passive loss rule and that is if your adjusted gross income is $100,000 or less and you actively participated in the passive rental activity you would be allowed up to a $25,000 deduction. This allowance does continue but is limited and phased out completely at $150,000 of adjusted gross income.

Rental Property Tax Deductions Have Many Considerations.

What I have just discussed are the basics as to receiving a deduction from a rental activity. Other items that need to be considered are material participation, basis, at risk rules, self rental, ownership, and vacation rentals to name some important terms. As you can see there is a lot to consider filing a proper rental Schedule E within your personal income tax return.

Please feel free to ask us rental property tax questions about the sale of rental property tax treatment, tax deductions for rental property, Schedule E (Supplemental Income and Loss on Form 1040), and tax saving on rental property using the form below:

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