Types of Rental Properties

• If you own a nonresidential rental property or rent out a home that you never use for personal purposes, you generally must report all rental income and can deduct all expenses that relate to the property. But if you rent a residence, such as a vacation home, and use it for personal purposes during the year, you may need to allocate the expenses between nondeductible personal use and deductible rental use. If your personal use is minimal, the IRS allows you to deduct all of the expenses. To deduct all of your expenses, you cannot use the home for more than the greater of 15 days per year or 10 percent of the days you actually rent the property.
  
  

Renting Your Home

• It's common for taxpayers to own a personal residence that has more than one dwelling unit in it. For example, if you live in the home but rent out a basement apartment, you must report all income to the IRS. When you calculate the deductible expenses, you must allocate all housing expenses between your own use and the rental use. An easy way to allocate expenses is by using the ratio of square footage of the studio apartment to the square footage of the entire home. For example, if your home is 2,000 square feet and the rental apartment is 500 square feet, then 25 percent of the expenses you incur for the entire home are deductible against your rental income.
  
  

Deductible Rental Expenses

• Just as a business can deduct all expenses, owners of rental properties can deduct the expenses that relate to the home. These can include the cost of advertising the apartment when it's vacant, cleaning and maintenance fees you pay, depreciation on the purchase price of the home and utilities. You can also deduct the mortgage interest and local property tax payments you make during the year that relate to the rental property.
  
  

Correct Tax Forms

• As an individual taxpayer, you need to report the rental income and deductions on either a Schedule C or E. You file a Schedule E for each property if you don't regularly and actively participate in managing the rental. For example, if you rent a single apartment to long-term tenants, a Schedule E is appropriate, as your activity is likely limited to paying the utilities, making necessary repairs and collecting rent. However, if renting properties takes up a significant amount of your time during the year, the IRS requires you to fill out a Schedule C instead because you operate like a business.