Updated: Wed, 02/20/2013 - 01:02

Own a rental home? Maximize income deductions

special photo - Cindy Klein
special photo - Cindy Klein
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As the housing market fell apart several years ago, many home owners opted to rent out their home rather than sell at a loss. If you are one of those people, you can take a plethora of deductions on your tax return.

To capture all possible deductions, you will want to organize your rental home tax records. Rental income, expenses and assets are key areas to focus on.

Rental income

Rental income, of course, includes the amounts of money or other property or services that you receive in exchange for the use of your rental property. Rental income also includes prepayments of rent for the year in which the rent was received.

So, if you require a deposit that includes the last month of rent when you sign a lease with a new tenant, you will be reporting that last month of rent when it is received, not when the last month of rental occurs.

The retention of a security deposit for cleaning or repairs is not taxable until the security deposit is forfeited by the tenant. When that occurs, the landlord has reportable rental income. The correlating cleaning or repair bills are deductible expenses as well.

Any amount that is paid by a tenant on behalf of the landlord to cover maintenance or improvement expenses is also considered to be rent.

Rental expenses

Rental expenses are varied and diverse. Common rental expenses include advertising, cleaning and maintenance, commissions, insurance, legal and professional fees, management fees, mortgage interest, repairs, supplies, taxes and utilities. All of these are deductible if they are directly related to the rental property.

Rental expenses may be deducted starting from the day the property is available for rent. Items paid on an annual basis, such as insurance and property taxes, should be prorated in the first and last year that the property is used as a rental property.

You need to be careful to differentiate between a repair and an improvement to the property. A repair is fully deductible in the year of the expense, but an improvement must be depreciated over a number of years.

Generally speaking, a repair is a cost that keeps the property in good operating condition and does not materially add value or substantially prolong the life of the property. An improvement betters or restores the property. An improvement can also adapt the property to a new or different use.

You may deduct mileage if you use your vehicle to check on the property, collect rent, perform repairs, etc. The rate for 2012 is 55.5 cents per mile.

Assets

The final type of expense is the depreciation of the assets affiliated with the rental property.

The largest asset is the home itself. Starting in the first year of service, you will depreciate using the 27.5 year Residential Rental Property Depreciation Table.

The assets within the home are depreciable as well. If you have appliances, furniture or carpeting, each of them will be depreciated.

Whenever you add an asset (or improvement) that asset will be added to your list assets and depreciated.

Net rental income or loss

Net rental income is computed on Schedule E and then transferred to your 1040 form. If an individual has a net rental loss, up to $25,000 is generally allowable as a reduction of income on the 1040. There are specific rules about this.

Your decision to rent out your home during the housing downturn may have been a decision of last resort. The tax benefits, however, are an advantage that you may not have considered.

Cindy Klein, is the director for the Premium Office of H&R Block in Savannah and can be reached at 912-355-2643 or cindy.klein@tax.hrblock.com.

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