Whether you have a stand-alone rental property or you are renting out half of a duplex that you live in, owning rental property opens up a whole new world of tax write-offs. In many ways, rental properties are treated like businesses. This means the IRS taxes your profits rather than the rent you receive. With the ability to write off many expenses, including gas and electricity, you can significantly reduce the taxes you pay.
The Schedule E Form
Schedule E is the form you use to report the information on your rental property income and expenses. At the top of the form, you list your rental properties. Next, you fill in all of the rents that you collected from them for the year. Below that, you enter all of the expenses that you paid in conjunction with owning the properties. Next, you subtract the expenses from the rental income to find your profit or loss. After adding up all of your buildings' bottom lines, you carry the total to your tax return.
Rental Property Deduction Rules
The IRS's rules allow you to write off the "ordinary and necessary expenses" that you incur in owning your rental property. These include the utilities that you pay for your rental property. If you're paying the gas and electricity bill for your tenant, you can write it off against your rental income. The IRS also allows you to write off the cost of repairs, maintenance, insurance, management and mortgage interest, just to list a few.
Offsetting Your Income
If you have a profit from your rentals, even after writing off gas, electricity and every other allowed expense, it gets added into your income so that you pay taxes on it. You might be able to write off any loss that you have on your rental property. The IRS allows you to deduct up to $25,000 in rental losses -- also called passive losses -- per year. To qualify, your modified adjusted gross income has to be $100,000 or less. If you make more than this, your write-off will be reduced by $1 for every $2 of income you earn over that threshold.
Partially Owner-Occupied Rentals
If you own a property where you live in part of it and you rent out part of it, the IRS effectively treats it as two properties. The part that you live in gets treated just like a standalone house, and the part that you rent out gets treated as a rental property. You will have to split any shared expenses between the two halves. For instance, if you pay the gas bill for both sides of the property, half of it would be deductible on Schedule E against the rental income you earn from that half of the property.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.