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

satisfied

under 14

more than 14

satisfied

 

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.

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: http://www.irs.gov/Forms-&-Pubs. 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.

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