How to Calculate Rental Deduction

Rental deductions can become complicated quickly.

Whether you are a landlord who owns rental property or just a student or homeowner who rents out part of your home to help pay the mortgage each month, you are required to report your rental income each year to the IRS. However, reporting your rental income allows you to take special deductions related to your property. These deductions fall into two main categories: rental expenses and property depreciation.

Instructions

Maintainence and Expense Deductions

1. Calculate the amount of money that you spent on advertising, cleaning, maintenance, insurance, mortgage interest, travel expenses and any other investments that you may have made in order to rent out your property. Note that large home improvement projects (such as remodeling the kitchen) cannot be counted here.

2. Figure out how much of the time your tenant used your property. For example, if you rented out a condo and only your tenants live there, then your tenant use percentage would be 100 percent. However, if you rent out a vacation home for half the year and use it yourself for the other half, your tenant use percentage would be 50 percent because you are taking up 50 percent of the rental property for your personal use.

3. Divide the tenant use percentage by 100 to get a decimal answer. If your tenant uses half the rental property, you would divide 50 by 100 to get 0.5.

4. Multiply the amount of money that you spent on your property by your usage percentage. For example, if you spend $700 on your rental unit and your tenant use percentage is 50 percent, you would multiply 700 by 0.5 to get a $350 deduction.

Depreciation

1. Determine your "basis" in depreciable property. Your basis in property is the amount of money that you paid for it, minus the value of the land. You will need to get a home inspector to tell you the actual value of your home. For example, if you paid $200,000 for a property and your inspector values your land at $50,000, then your basis in depreciable property is $150,000.

2. Divide the value you got in the previous step by 27.5. The IRS depreciates rental property over 27.5 years, which means that you can depreciate your rental property over 27.5 years on your tax returns. If your home is worth $150,000, you would divide that by 27.5 to get $5,454.

3. Claim a loss of $5,454 on your tax return as your depreciation-based loss. You can deduct both depreciation loss as well as any money you spent to maintain the rental unit.

References

• IRS.gov: 1. Rental Income and Expenses (If No Personal Use of Dwelling)
• IRS.gov: 5. Personal Use of Dwelling Unit (Including Vacation Home)
• IRS.gov: 4. Figuring Depreciation Under MACRS