The Internal Revenue Service has guidelines that define rental property. Two of the most common types of rental property include vacation homes and permanent rentals. Rental income is reported on your annual tax return, but money-saving deductions are associated with the expenses involved in renting a property.
Permanent Rental
One of the IRS definitions of rental property is a property that permanently serves as a rental. A permanent rental is never used as living quarters for the owner or any dependents he claims on his federal tax return. A permanent rental is a house, duplex or apartment complex that serves full time as a rental and is not used by a nonprofit organization.
An owner is eligible to deduct expenses related to the rental on his income taxes, but he must also report all income that is associated with the permanent rental property.
Vacation Home
The IRS defines another type of rental property as a vacation home. A vacation home is considered a rental if it is rented out at any time during the course of the year. For most vacation home owners, time spent at the vacation home is minimal compared to time spent at the primary home.
A homeowner can only deduct the portion of expenses associated with the vacation home that is incurred when renters live in the vacation home. Most tax specialists use prorated amounts to determine deductible expenses. If the vacation home is not rented out at any time during the year or the inhabitants are allowed to stay for free, the vacation home is not a rental property.
Non-Profit Rental
According to IRS definitions for rental property, a nonprofit rental is a house, duplex or apartment that is rented with no profit going to the owner. As a result, all eligible expenses associated with the property are deductible. A nonprofit rental is a property that is not inhabited by the owner during any portion of the year.
Partial Property Rental
A partial property rental is one in which part of the property is rented, and the other part is inhabited by the owner. This is especially common with duplexes and apartment complexes in which the owner lives in one of the units.
Another partial property rental is one in which the owner rents part of his house, like the basement or an apartment room, to another person. According to the IRS, a portion of the house is a rental, but the majority of the house is the owner's primary residence. Only the portion of expenses associated with the rental is deductible, and all rental income is reported.
References
- IRS: Publication 527 (2018), Residential Rental Property
- Turbo Tax: Real Estate Tax and Rental Property
- About Publication 527, Residential Rental Property (Including Rental of Vacation Homes) | Internal Revenue Service
- Internal Revenue Service. "Know the tax facts about renting out residential property." Accessed May 9, 2020.
- Internal Revenue Service. "Topic No. 415 Renting Residential and Vacation Property." Accessed May 9, 2020.
- Internal Revenue Service. "Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)." Accessed May 9, 2020.
- Tax Foundation. "A Tradition Unlike Any Other: The Masters Tax Exemption." Accessed May 9, 2020.
- Internal Revenue Service. "Publication 527: Residential Rental Property." Accessed May 9, 2020.
- Internal Revenue Service. "Publication 527: Residential Rental Property." Accessed May 9, 2020.
- Internal Revenue Service. "Publication 527: Residential Rental Property (Including Rental of Vacation Homes)," Page 17-18. Accessed May 9, 2020.
- Internal Revenue Service. "Publication 527: Residential Rental Property." Accessed May 9, 2020.
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