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Personal Use of Business Property (Condo, Timeshare, etc.)

Question: I am renting a house to my son and daughter-in-law. Can I claim rental expenses?

Answer:

In general, if you receive income from the rental of a dwelling unit, such as a house, apartment, or duplex, there are certain expenses you may deduct.

Besides knowing which expenses may be deductible, it is important to understand potential limitations on the amounts of rental expenses that may be deducted in a tax year.

There are several types of limitations that may apply.

Not for profit activities:

  • If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income.
  • Any rental expenses in excess of rental income cannot be carried forward to the next year.
  • Refer to Publication 527, Residential Rental Property, and Publication 535, Business Expenses.

Rental of a dwelling unit (for profit):

  • The tax treatment of rental income and expenses for a dwelling unit that you also use for personal purposes depends on whether you use it as a residence, which depends on how many days such unit is used for personal purposes.
  • Renting to a relative may be considered personal use even if they are paying you rent, unless the family member uses the dwelling unit as his or her main home and pays rent equivalent to the fair rental value.
  • Refer to Publication 527, Residential Rental Property.

Passive Activity losses:

  • In general, you can deduct passive activity losses to the extent of passive activity income (a limit on loss deductions).
  • You carry any excess loss forward to the following year or years until used, or you carry any excess loss forward until the year you dispose of your entire interest in the activity in a fully taxable transaction.
  • There are several exceptions that may apply to the passive activity limitations. Refer to Publication 527, Residential Rental Property and Publication 925 (PDF), Passive Activity and At-Risk Rules.

At risk rules:

The at-risk rules limit your losses from most activities to your amount at risk in the activity.

  • You treat any loss that is disallowed because of the at-risk limits as a deduction from the same activity in the next tax year.
  • If your losses from an at-risk activity are allowed in a previous taxable year and your amount at risk drops below zero at the close of any later taxable year, then you must include a recapture amount in your gross income for such later taxable year.

Additional Information:


Category: Sale or Trade of Business, Depreciation, Rentals
Subcategory: Personal Use of Business Property (Condo, Timeshare, etc.)

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue NW
Washington, DC 20224