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, Seattle CPA firm, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

Necessary Tax Documents for Reporting Rental Property Income

As a law abiding property owner, to completely record and report your annual rental property income to the Internal Revenue Service, you will need different Internal Revenue Service tax documents which will be discussed within this brief article. As laid out in this article, the tax documents considered necessary change depending on the particular official business who is the owner of the rental property (individual, partnership, corporation, or LLC). For further information on legal entity rental property ownership, look at the article in this Guide, titled Best Rental Property Ownership.

TIP: Quick note – You can locate the forms described in the following paragraphs on the Internal Revenue Service’s homepage: http://www.irs.gov/Forms-&-Pubs. Each of the necessary documents should be included in any tax preparing computer software, if you use one of them.

Individual Ownership

Which includes joint ownership with a wife or husband, tenancy in common, or shared tenancy with legal rights of survivorship.

Form 1040. All individual people have to file Form 1040, so this is the place you need to get started. Your own net rental property revenue or financial loss subject to taxation will appear on line 17 from the first page in Form 1040. You aren’t able to take advantage of the easy Forms 1040A or 1040-EZ, as a property manager with rental activity.

Schedule E. The addendum to Form 1040 you have to know about is Schedule E. It actually has various uses, however the usage that is meant for you is reporting of leasing profit and expenses. The only element of Schedule E that you have to complete is the segment titled “Part I”. Different essential tips to be aware of: when reporting on a rental you jointly own with a person, who is not your significant other, you just need to report the costs which you sustained and also the profits which you earned. Don’t forget, furthermore, that you will have to keep track of your expenses regarding rental and non-rental use if you’re renting a segment of your own personal residence, or whenever you only leased for part of the entire year. Look at the series of articles called Tax Deductible Rental Property Expenses, contained in this Guide, for more tips.

Form 4562. At line 18 of Schedule E, you are able to deduct the depreciation on the property, which you will use Form 4562 to figure out. For more details, look at the article called, Depreciation Expenses for Rental Property, which is in this Guide.

Partnership/Corporate Ownership

Such as a general or limited partnership, or S corporation.

Form 1065/1120-S. The tax form a collaboration utilizes to report all of its enterprise operations is Form 1065, which you will need to fill out if you have a joint venture. An S corporation uses Form 1120-S to report its business activities. Your total leasing revenue or deficit should be reported on Schedule K, line 2 of Form 1065 or 1120-S (Schedule K is embedded in those forms).

Form 8825. This tax form functions like Schedule E, except that it’s for partnerships and S corporations. Schedule E and Form 8852 are basically similar. Make sure you include whole sums of all profits and operating costs accrued by the partnership or corporation (In the future, they are allocated to each shareholder or business partner).

Schedule K-1. This tax form reports the total leasing income or loss due to each partner or shareholder in line with that business partner or investor’s rental property ownership interest. Each partner receives their own personal K-1 and must report the details of their K-1 on their own Form 1040, Schedule E, Part II.

Limited Liability Company (LLC) Ownership

A single owner LLC is actually a disregarded entity for taxation requirements, which means you can file just like you’re an individual rental property owner (see above). A multiple-member LLC has the option to be taxed as a partnership or as an S corporation (see 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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