Tax Advantages to Renting House at a Loss
If a rental house generates more income than expenses, you rent at a profit. If the rental income doesn't cover your expenses, you rent at a loss. However, there are tax advantages to renting a house at a loss; consider the tax implications when you calculate your rental income.
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Depreciation
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As the owner of a rental house, you can depreciate the basis of your rental home over 27 1/2 years as of 2011. The basis of your home includes the cost of the structure and improvements. It does not include your land, because bare land does not deteriorate with age. Depreciation on your rental house can offset other earned and unearned income, reducing your overall tax burden.
Other Deductions
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You can deduct other necessary expenses related to your rental house in addition to depreciation, adding to your tax savings. Expenses such as mortgage interest, property maintenance, advertising, insurance and utilities are all deductible. When you claim all the deductions to which you are entitled, the very expenses that make your rental a loss in monthly cash flow help to shelter your rental income from taxes and help reduce the taxes you pay on your income from other sources.
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Appreciation
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Historical real estate records suggest that real estate goes through a process of correction, stabilization, recovery and revival every 12 to 15 years. Renting your house at a loss helps you keep your rental long enough to reach the recovery and revival stage, when you can sell it for a higher price. The capital gain tax rate, which is lower than the tax rate for earned income, applies to the income you receive from selling your rental house.
Claiming Income and Losses
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Taxpayers use one of several forms to report rental income and losses. Landlords who also collect farm rental income use Form 4835. A married couple who owns the rental as a joint venture uses Schedule C or Schedule C-EZ to report rental income and losses. Taxpayers use Schedule E to report income and losses from a rental house in all other circumstances. The IRS, certified public accountants and tax advisers offer guidance to help you determine which form to use.
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