Private Use of Rental Property

The guidelines associated with the personal and leasing utilization of premises are included in this article in the Landlord’s Tax Guide. This may be either because you are leasing out a space in the same property which you are living in, or you have got a vacation residence that you might privately employ a few weeks out of the calendar year and rent the remainder of the time. This information will not apply to you at all if you never use your rental property for personal use. However, if you do, you will want to keep reading.

Property rented for less than fifteen days. Any time you leased your property for less than fifteen days total in the past year, you don’t have to file any of your rental revenue. If this is the scenario, then the real estate property is going to be considered personal for taxation considerations, and on Schedule A of Form 1040, it is possible to deduct any of the property associated expenditures as personal.

Employing Your Holiday Home as a Part Time Rental

Personal use test. It’s important to work with some type of numeric formula to determine the total number of days during which the rental property was used for personal use. That is the personal use test. How you deduct your rental expenses is going to largely be determined by whether or not the personal use test is satisfied. Finding out the actual quantity of days in the past year in which the real estate property was leased out at fair market value is the initial step in calculating the personal use test. The next step is to multiply that number of days by ten percent. We will label the outcome the “total days rented” or “TDR” for short. The next stage will be to figure out how many days the rental property was employed for private use. We can label this “personal use days” or “PUD” abbreviated. Look at the table below for a vision of the personal use test.

NOTE: “Personal use” consists of use by you, any other owners of the home and property, plus the families of all individuals who own the property, unless of course your family member is paying out rent at fair market value.

If TDR is…

and PUD is…

then the personal use test is…

over 14

less than TDR

not satisfied

under 14

less than 14

not satisfied

over 14

more than TDR


under 14

more than 14



If test is satisfied. If the personal use test is satisfied, you will deduct your rental expenses only to the extent of the rental income. A net rental loss will not be attainable, but when there are any additional expenditures you do not write off this year, they can be moved forward to later years, provided that there is an adequate sum of rental earnings in the tax year in which you claim them.

If test is not satisfied. Your own leasing costs will never be restricted by the rental income if the personal use test is not satisfied. You could deduct your rental costs and also have a net rental loss. There could be a few passive activity rules, however, which may still restrict the rental loss tax deduction.

Computing all of your rental expenditures. A number of expenses should be allocated between leasing and personal application. These include expenditures that will have already been charged no matter the use, such as real estate taxes and mortgage interest. Find out the whole number of personal use days. Then, you will need to determine the total quantity of TDR. After that, divide rental days by the sum of PUD and rental days. The end result is the rental percentage. Finally, you have to multiply the total cost of your expenses by the leasing percentage that you have established, and then the result will be the rental deductible part.

Leasing a Section of Your House

You need to expressly allot all your costs in between private usage and leasing use if you rent out a part of your own personal home. The IRS allows a little versatility with the method you employ; just make sure it’s consistent from year to year. Some people choose the option of taking the number of rooms within their residence along with the number of rooms within the home, and divide them. Dividing the rented sq . ft . by the residence’s total sq . ft . is another option that lots of people go for. You’ll end up with rental costs and personal costs. Those allotted to the leasing income can be deducted as such, and you can use Schedule A of Form 1040 to deduct what’s left.

Bellevue CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

Tax Deductible Rental Property Costs: Insurance, Cleaning/Maintenance, and Repairs

If you are currently leasing your property out for income, it is crucial to make sure that specific expenses and services are properly arranged and reported for taxation considerations. In this article, we will name these important expenses.


Insurance payments are pre-paid prior to a specified time period. An example here could be: you bought insurance coverage for this exact rental property on March 2012 for $1200. April 2012 to March 31, 2013 will be the policy period of this insurance policy. Since the protection period does surpass the current tax year, you need to apportion and allocate the insurance premiums applicable to this present year only and then carry forward the rest for the upcoming reporting year. This means $900 (9 months April to Dec 2012) or $100 per month of qualified rental property utilization will be your allowable insurance premium.

Note that many Insurance companies commonly bundle insurance premium packages among personal and business clients for a lower charge. You must make sure that you just allot the part which is applicable in your business rental property from this deduction. You may use your own tax return to deduct any non business related or personal utilization. You can include Title Insurance within the Cost Basis of the rental property, as it is not an allowable expense.

Cleaning and Maintenance

The day to day maintenance of the rental property is a deductible expense as long as it is only for commonly used spaces and routine cleaning. These types of expenses are restricted to the days that are tax deductible leasing hours rather than personal use days. To ensure that the property is in fine shape and running order, you can try what various other property owners do, and engage a local area hired company to maintain your rental property. These types of services will give you a number of professional services which include basic upkeep, dusting, window washing, and appliance cleaning. Just these kinds of services are allowed, any type of major structural improvements and alterations should be invested in the Cost Basis of the property.


From time to time, there could be some kind of necessity to fix a home appliance, touch up some painting, or any other endeavor that doesn’t demand a significant remodelling of the rental property framework. In accordance with the leasing duration, you’ll be able to deduct such required and ordinary expenses.

You must observe that these types of expenses that are typically tax deductible in relation to the income of the property, you mustn’t incorporate the periods which are deemed individual times of use. The only expenditures that are deductible are those that are related to the authorized rental time frame, specifically.

You can obtain the various reports defined within this information on the IRS’s website. If you want additional information, view IRS Publication 527.

Bellevue CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Tax Deductible Automobile and Local Area Travel Business Expenses Regarding Rental Premises

When the special transportation business expenses of your personal cars or any other automobile are regular, necessary, and fit a few variables, then they can be deducted. Should you use your personal automobiles to take care of and operate your rental premises, or even obtain rent from occupants, you may deduct all of these expenditures. Be aware that commuting to work is a private cost and not allowed for deduction. Also, you cannot write off the expenses of travelling from where you live to work on your property or make improvements. A cost recovery system such as depreciation will typically deal with that.

Actual Expenses

Using this solution you may report all the expenditures pertaining to traveling out of the home connected with the leased residence. IRS Publication 463, Chapter 5 specifies the way these types of costs will have to be recorded and backed up with invoices. You must have a physical record to backup any deductions; of course, it is a good idea to back up your files with software applications on the market available via iPod, Quick Books, Mint and so on. You must report these either on the Schedule C or Schedule E together with other necessary forms. If you have more than one property, your expenditures must be allotted to the individual premises where the expenses accrued. Only travel costs which are relevant to rental properties are permitted, so do not add in  personal or other kinds of non-property related expenses in your deductions.

Mileage Method

Here you may deduct your actual distance traveled. For example, if you drive 1200 miles during 2012, you’d use the current standard mileage taxation rate of $0.55.5 per mile and deduct the total.

You’ll need paperwork to support usage of local transportation such as automobile rentals, metro bus companies, and Zip Cars. These must be exclusively connected to your real-estate. If employing public transit, it is suggested that you save fare cards. It is a good idea to allocate rental car and Zip Cars expenses to a business account.

Quick Note: You can obtain the different documents outlined in this information on the IRS’s webpage. Consult IRS Publication 527 for additional information.

Bellevue CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Important Tax Forms for the Purpose of Reporting Rental Property Income and Expenses

This valuable article is focused on the many Revenue Service tax documents you’ll need as a landlord in order to fully record, and report, your rental funds to the IRS. As discussed below, the tax forms needed will vary in accordance with the sort of legal business who possesses the rental property (individual, partnership, corporation, or LLC). Read the page called Best Rental Property Ownership, provided inside this Guide, for more information about legal entity property ownership.

TIP: Note – You will find all of the forms covered in the following paragraphs on the Revenue Service’s homepage: The various appropriate forms are going to be contained in any tax preparing software programs, should you use one.

Individual Ownership

Mutual rental property ownership with a partner, mutual tenancy with legal rights of survivorship, along with tenancy in common will be examples.

Form 1040. All individual taxpayers must use Form 1040, and this is exactly where you have to start. In line 17 of the first page of Form 1040 is your net leasing profits or losses, subject to taxation. You aren’t able to utilize the easy Forms 1040A or 1040-EZ, as a good property manager with rental income and expenses.

Schedule E. Schedule E is one addendum of Form 1040. There are various usages, but the function meant for your needs is reporting of rental profits and expenses. The single portion of Schedule E that you should fill out is the portion marked as “Part I”. A few relevant notes to keep in mind: if reporting on a rental that you jointly own with another person, other than your spouse, you only need to report the costs that you suffered plus the income which you earned. Remember, also, that you’ll have to keep track of your expenses relating to rental and non-rental purposes should you be leasing a share of your own private home, or if you leased only for a part of the calendar year. For additional information, take a look at Tax Deductible Rental Property Expenses, the article series which is provided with this Guide.

Form 4562. On line 18 of Schedule E, you’ll be able to deduct the depreciation of your rental property, which you must employ Form 4562 to work out. For additional tips, view the article called, Depreciation Expenses for Rental Property, that’s provided in this Guide.

Partnership/Corporate Ownership

A general or limited partnership, or S corporation is included.

Form 1065/1120-S. For people who have a partnership, you have to use Form 1065, the tax form a joint venture utilizes to report all of its enterprise operations. An S corporation utilizes Form 1120-S to report its company operations. Your annual total leasing profits or loss will be reported on Schedule K, line 2 of Form 1065 or 1120-S (These documents are integrated with Schedule K).

Form 8825. Form 8825 is for partnerships and S corporations, yet works just like Schedule E. Schedule E and Form 8852 are essentially very similar. Ensure that you include whole amounts of any revenue and expenses sustained by the partnership or corporation (these are going to be allotted to each business partner or investor later on).

Schedule K-1. This tax document reports the net leasing profits or deficit owing to each business partner or investor as outlined by that partner or investor’s ownership interest. Every business partner is provided with her or his own personal K-1 and has to report the details of the K-1 on their own Form 1040, Schedule E, Part II.

Limited Liability Company Ownership

You can file like you are an independent property owner on the grounds that, for taxation objectives, a single-member LLC is really a disregarded entity (look above). A multiple-member LLC might choose to be taxed as either a partnership or as an S corporation (look above).

Seattle Accountant has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Home Office Deductions for Landlords: An Overview

The IRS claims that home office deductions are no more likely to encourage an audit than any other tax deductions, Still many taxes payers are leery of this deduction. The solution: stick to the rules and keep records, and you should have nothing to fear.

The key to this tax deduction is that rental property owners may claim this write-off if they are active, which is to say you must be doing more than cashing checks. If you regularly spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.

After you’ve met this qualifier you will also have to meet the basic home office deduction thresholds. To begin with, you must use the home office exclusively for your rental business on a regular basis.

Then you’ll also have to meet at least one of the following:

1. This office must be your principle space for the day-to-day running of your rental property business.

2. You must have no other location from where you run the administrative end of your property managment rental business.

3. You connect with tenants there.

4. You use a separate structure on your property for business.

After you have applied the threshold tests above and determined that the work area in your home does in fact meet the requirements for the home office deduction, you have to look into what kind of expenses can be written off. There are direct and indirect types of home office deductions. Direct expenses exclusively benefit the home office area of your home, expenses such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of your house. Property tax, insurance, mortgage interest, and utilities are typical examples of indirect expenses. Square footage is the usual way of determining the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house with a 200 square foot home office area would mean 10% of the indirect expenses could be written off as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters if the house is sold.

Because you don’t want any trouble if you do get audited, you want to keep good records to establish that you were actually entitled to take the deduction and that the claim has been accurately reported. You should document the home office space with a diagram and/or photograph that supports your calculations. It is smart to use your home office address on your business cards and other forms of collateral and to have business mail delivered to the office address. You should keep a log of client meetings and other time spent working in this space. Records to keep proving expenses include: 1098 mortgage interest statements, property tax statements, utility bills, insurance premium notices and receipts for other relevant home office expenses.

Home office deductions can get complicated. Please do not consider this to be reasonable solution to the informed counsel of seasoned Bellevue CPA. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.

Bellevue Accountant +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.



Tax Deductible Rental Property Expenses, Part 1

There are numerous deductible expenses linked with owning a rental property. In this write up we will focus on expenses regarding interest, advertising, and professional fees, these are expenses you may deduct from your gross rental income to calculate the net rental income.


If you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to pro rate the mortgage expense. (See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use). Now if you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Also, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property.


Promoting your rental property on the open market, through marketing efforts such as posting newspaper ads or paying for internet marketing, is a tax deductible expense.

Professional fees

If you pay a lawyer to write a rental agreement or initiate court actions in order to evict a renter, it’s possible to deduct these expenditures. Additionally you can deduct fees paid to a Bellevue accountant for prepping the Schedule E of your return from the previous year. Make sure you pro rate the entire fee between the rest of your return versus the Schedule E portion of you return based on time spent. Any fees unrelated to the Schedule E appear on Schedule A as personal tax preparation expenses. Also any commissions or management fees to realty groups for overseeing your rental property are deductible as well.

Bellevue CPA has written numerous articles on accounting and tax related issues of interest to the small business owner. He is a graduate of Washington State University and the University of Washington School of Law with a Masters in Tax Law.

Startup Expenses and Deductions

Particular expenses incurred as you prepare a rental property (prior to ultimately letting the rental property,) are tax deductible. So let’s take a look at a couple of them.

NOTE: These startup expenses reviewed in this write-up will not be the same variety of expenses that are allowable as a deduction according to Internal Revenue Code section 195. Under the section 195, specific startup expenses (in an active trade or business) are deductible up to $5,000 with a balance amortizable over fifteen years. But, section 195 does not apply to rental property this is because renting is not regarded an active business or trade, but rather it is regarded a passive activity. See the article Tax Deductible Rental Losses, included in this Guide, for more on passive activity rules.

Note: It isn’t just when you have literally rented a property that rental activity “begins”, but when you’ve made the property available for rent.

Expenses to Obtain Mortgage

Expenses such as mortgage commissions, abstract fees, and recording fees, are capitalized and turned out to be part of your basis in the property. And this means that you’ll have to depreciate such expenses, instead of expensing them all at once. Read the Depreciation Expenses for Rental Property article, included in this Guide, for more on depreciation.


What are points? They are charges paid by a borrower to take out a mortgage or a loan. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are deductible as interest, but require that you amortize the points over the life of the loan. Determining the amount of points to amortize per year, is task beyond the scope of this article. Make an appointment with a certified public accountant.

Improvements versus Repairs

You must capitalize and depreciate improvements to the property previous to putting it on the market. Improvements prolong the use of the property or materially increase the property’s market value. On the other hand, you may freely deduct all repair expenses. A repair maintains your property in good working condition without adding to its value or prolonging its use. See the series of articles about deductions and depreciation, included in this Guide, for more information.

Bellevue Tax Accountant is a graduate of the University of Washington School of Law, with a Juris Doctorate and a Masters in tax Law.

Ownership of Rental Properties

Let’s begin by looking at the various entity selection types that are available. Each has pros and cons. As a rule of thumb, look to protect your property from unsecured creditors and limit your liability. So let’s unroll the list and see what we’ve got here.

When forming an entity, you’ll have to visit to register.

TIP: Consult with a Bellevue Accountant or attorney before establishing an entity and transferring ownership of your rental property to it. This landlord tax guide isn’t meant to be an all-in-one solution you should seek the attention of a qualified professional.

Individual Ownership

This form of ownership is the most common and simplest method of ownership and occurs when you purchase a rental property in your name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The main advantage here is that this is straightforward, and does not require you to file any complicated paperwork or pay any lofty filing fees. The main disadvantage to this kind of ownership is that your creditors may be able to force a sale of the rental property if they attain a court judgment against you, or compel you into involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited partnerships, general partnerships, limited liability companies, and corporations. Let’s look at the differences a bit later. Now let’s look at the principal benefit of entity ownership, and that would be that with entity ownership your personal creditors cannot force a sale of the rental property. The only entity type that does not require registration with the secretary of state is the general partnership. Regarding taxes, the entity type doesn’t matter that much because in most cases rental income is taxed on your personal tax return, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the Landlord Tax Guide.

General partnership. This form of ownership takes place when two or more persons co-own a for profit business. Now with this general partnership each partner has equal management privileges, however each partner is personally liable for the debts of this partnership. And thus a general partnership is usually not preferred.

Limited partnership. A limited partnership is more complex because this method of ownership involves one limited partner and at least one general partner. The limited partner will not be personally liable for the debts resulting from the partnership, but also has no management rights. Now the general partner has sole management rights, as well as personal liability for the debts of the partnership. This arrangement is generally not recommended.

Limited liability partnership/company. A limited liability company and a limited liability partnership are rather similar entities, both provide for limited liability to the partners/members. This would mean that you will not be personally liable for the entity’s debts, except in cases when the debt is a result of your own wrongdoing. This mode of ownership often is preferable because of limited liability and also there are fewer formalities which require observance than with corporations.

Corporations. Corporations allow for perpetual existence and limited liability. And yet on the other hand, they demand the observance of unyielding formalities so as to preserve the limited liability shield. Without these formalities, a court order may “pierce the corporate veil” and hold you personally culpable. It is for this reason that LLPs and LLCs are typically more desirable for a rental property owner. Additionally, for tax purposes, corporations are split into “S” corporations and “C” corporations. When a corporation is taxed as a “C” corporation, it pays tax on the rental income, and then you will pay tax again when the corp pays out dividends. And you should steer clear of this “double taxation” catch.

Bellevue Tax CPA is a graduate of both the University of Washington and Washington State University. He has written numerous articles on various tax related subjects.

  • Huddleston Tax CPAs – Bellevue, WA
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