Tax Planning for Rental Real Estate
Owning a rental property can offer great financial benefits, but it’s important to understand how the tax rules work so you can make the most of them! Whether you’re renting out your home occasionally or managing a rental property, knowing the difference between personal and rental use is key.
Homes Rented for Less than 15 Days
If you rent out your home for fewer than 15 days during the year and use it personally for at least 15 days, the IRS considers it a personal residence. In this case, you’re not required to report the rental income on your tax return at all- it’s completely tax-free. Even better, you can still deduct mortgage interest and property taxes on Schedule A if you itemize your deductions.
Homes Rented for More than 15 Days
On the other hand, if your home is rented for 15 days or more and your personal use is limited to less than 15 days- or less than 10% of the total rental days- the property is treated as a rental property for tax purposes. That means you’ll need to report the rental income and allocate expenses like utilities, insurance, and repairs based on the number of days it was rented versus total days used. If your rental expenses are higher than your rental income, you may end up with a taxable loss.
Passive Loss Rule Exception
However, there’s a catch. Rental losses are typically considered “passive”, and the IRS only allows you to deduct them if you have other passive income to offset. That said, there’s an exception for taxpayers who actively participate in managing their rental property- meaning they make decisions like approving tenants or arranging for repairs. If your adjusted gross income (AGI) is below $100,000, you may be able to deduct up to $25,000 of rental losses. This benefit gradually reduces as your income rises, disappearing completely once your AGI hits $150,000. Keep in mind, this exception doesn’t apply to short-term rentals averaging seven days or less per stay.
Tax planning for rental real estate doesn’t have to be complicated, but it does require attention to detail. Keeping good records of how your property is used- and understanding the IRS rules that apply- can help you stay compliant and take advantage of valuable tax benefits. If you’re unsure where you fall, it’s a good idea to talk to a tax professional who can guide you based on your specific situation.