Owning rental real estate opens the possibility for certain write-offs and deductions for expenses that you can't write off for your personal residence. You are still allowed to take any personal residential deductions for which you're eligible, such as mortgage interest and real estate taxes. If you live in one of your own units, you may be able to write off only a portion as a business expense, depending on the circumstances.
Your rental property is considered a business by the Internal Revenue Service, and Uncle Sam expects you to report all rent received and expenses paid on Schedule E. You can't write off any expenses for your personal residence here, but you can deduct everything you spend on the rental, as long as it's a necessary and ordinary expense to own and operate a rental property. Keep careful receipts of everything, and when possible, avoid combining personal and rental expenses. Maintaining separate expenses and records will help if the IRS ever decides to take a closer look at your deductions.
Writing off mortgage interest is one of the most beloved perks of owning a home. For your personal residence, you'll still take the deduction on Schedule A. In fact, you can deduct the mortgage paid on a second mortgage and on your second residence or vacation home. For your rental property, you'll take the deduction on Schedule E. If you live in one unit of a duplex, or other multi-unit property, and rent out the rest, you'll need to split the deduction between business and personal. Use the square footage percentage to determine how much is for your personal space, deduct that on Schedule A and write off the remainder on Schedule E.
Here's another windfall deduction for rentals that you can't deduct from for your own home and it's a doozy: IRS laws allow you to write off the purchase price of the rental property over 27.5 years. Because the latest depreciation tables are front-loaded, this deduction provides some balance against your rental income, especially in the early years. If you're living in one unit while renting out the others, you'll need to prorate the depreciation and write off only the amount for the business-use property.
As a homeowner, you can write off property taxes and mortgage interest on Schedule A. For your rental property, however, you can write off utilities you pay, property insurance, homeowner association dues, landscaping, maid service, all repairs and maintenance and any other expense incurred. You can even write off the cost of an ad to find tenants or the cost of legal fees if you run into trouble with those tenants. All of these expenses go on Schedule E.
If you sell a personal residence that you lived in for at least two of the last five years, you can exclude up to $250,000 of capital gains, or up to $500,000 if you're married filing jointly. However, if you sell a rental property, you'll have to pay tax on the full capital gains. The exclusion is only for homeowners. You'll also reduce your basis (cost) of the property by accumulated depreciation, so you'll find you're paying back capital gains taxes on some of the rental deductions you benefited from earlier.
Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.