Private Use of Rental Property

The guidelines associated with the personal and leasing utilization of premises are included in this article in the Landlord’s Tax Guide. This may be either because you are leasing out a space in the same property which you are living in, or you have got a vacation residence that you might privately employ a few weeks out of the calendar year and rent the remainder of the time. This information will not apply to you at all if you never use your rental property for personal use. However, if you do, you will want to keep reading.

Property rented for less than fifteen days. Any time you leased your property for less than fifteen days total in the past year, you don’t have to file any of your rental revenue. If this is the scenario, then the real estate property is going to be considered personal for taxation considerations, and on Schedule A of Form 1040, it is possible to deduct any of the property associated expenditures as personal.

Employing Your Holiday Home as a Part Time Rental

Personal use test. It’s important to work with some type of numeric formula to determine the total number of days during which the rental property was used for personal use. That is the personal use test. How you deduct your rental expenses is going to largely be determined by whether or not the personal use test is satisfied. Finding out the actual quantity of days in the past year in which the real estate property was leased out at fair market value is the initial step in calculating the personal use test. The next step is to multiply that number of days by ten percent. We will label the outcome the “total days rented” or “TDR” for short. The next stage will be to figure out how many days the rental property was employed for private use. We can label this “personal use days” or “PUD” abbreviated. Look at the table below for a vision of the personal use test.

NOTE: “Personal use” consists of use by you, any other owners of the home and property, plus the families of all individuals who own the property, unless of course your family member is paying out rent at fair market value.

If TDR is…

and PUD is…

then the personal use test is…

over 14

less than TDR

not satisfied

under 14

less than 14

not satisfied

over 14

more than TDR

satisfied

under 14

more than 14

satisfied

 

If test is satisfied. If the personal use test is satisfied, you will deduct your rental expenses only to the extent of the rental income. A net rental loss will not be attainable, but when there are any additional expenditures you do not write off this year, they can be moved forward to later years, provided that there is an adequate sum of rental earnings in the tax year in which you claim them.

If test is not satisfied. Your own leasing costs will never be restricted by the rental income if the personal use test is not satisfied. You could deduct your rental costs and also have a net rental loss. There could be a few passive activity rules, however, which may still restrict the rental loss tax deduction.

Computing all of your rental expenditures. A number of expenses should be allocated between leasing and personal application. These include expenditures that will have already been charged no matter the use, such as real estate taxes and mortgage interest. Find out the whole number of personal use days. Then, you will need to determine the total quantity of TDR. After that, divide rental days by the sum of PUD and rental days. The end result is the rental percentage. Finally, you have to multiply the total cost of your expenses by the leasing percentage that you have established, and then the result will be the rental deductible part.

Leasing a Section of Your House

You need to expressly allot all your costs in between private usage and leasing use if you rent out a part of your own personal home. The IRS allows a little versatility with the method you employ; just make sure it’s consistent from year to year. Some people choose the option of taking the number of rooms within their residence along with the number of rooms within the home, and divide them. Dividing the rented sq . ft . by the residence’s total sq . ft . is another option that lots of people go for. You’ll end up with rental costs and personal costs. Those allotted to the leasing income can be deducted as such, and you can use Schedule A of Form 1040 to deduct what’s left.


Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

Tax Forms which Will Be Necessary for Reporting Rental Income and Expenses

As a law abiding property owner, to thoroughly record and report your annual rental funds to the Revenue Service, you must have different Internal Revenue Service tax documents which you’ll find layed out inside of this brief article. As laid out just below, the tax documents considered necessary change depending on the sort of official organization which manages the rental property (individual, partnership, corporation, or LLC). View the article entitled Best Rental Property Ownership, included inside this Guide, for additional info about legal entity rental property ownership.

TIP: Each of the documents discussed below are available on the Internal Revenue Service’s website, at: http://www.irs.gov/Forms-&-Pubs. If you’re using tax preparing programs, it will have all of the necessary forms.

Individual Ownership

Which includes shared property ownership with a significant other, tenancy in common, or mutual tenancy with right of survivorship.

Form 1040. First and foremost, you will have Form 1040, the document filled out by all independent taxpayers. On line 17 of the first page of Form 1040 will be your total rental profit or financial loss, subject to taxes. You will not be able to take advantage of the simple Forms 1040A or 1040-EZ, as a property manager with rental income and expenses.

Schedule E. Schedule E is a certain addendum to Form 1040. Of this addendum’s assorted usages, the purpose of reporting leasing profit and expenses is applicable to yourself. The section of Schedule E labeled as “Part 1” will be the single part you have to fill in. A few relevant tips to keep in mind: if you own the rental mutually with another person who isn’t your spouse, report about the profit you gained along with the expenditures that you sustained. Also, do not forget that if you rented for just a portion of the entire year, or you were renting a section of your personal property, you’ll need to keep track of your expenditures concerning rental and non-rental use. To get more advice, check out Tax Deductible Rental Property Expenses, the article collection which is provided inside this Guide.

Form 4562. On line 18 of Schedule E, you will deduct the depreciation of your rental, which you’ll use Form 4562 to calculate. For more advice, look at the article titled, Depreciation Expenses for Rental Property, which is included in this Guide.

Partnership/Corporate Ownership

Such as a general or limited partnership, or S corporation.

Form 1065/1120-S. The form a joint venture uses to report each of its company operations is Form 1065, that you must use when you have a partnership. Form 1120-S is utilized by an S corporation to report company operations. The total rental profit or deficit are going to be reported on Schedule K, line 2 of Form 1065 or 1120-S (Schedule K is embedded within those forms).

Form 8825. Form 8825 is for partnerships and S corporations, but works similar to Schedule E. Schedule E and Form 8852 are essentially similar. Make sure to report whole sums of any profits and expenses accrued by the partnership or corporation (In the future, they will be allocated to each investor or partner).

Schedule K-1. The total leasing earnings or financial loss due to each investor or partner is reported by this tax document, as outlined by the ownership interest of each shareholder or business partner. The information of the K-1 received by each individual partner needs to be reported on his or her Form 1040, Schedule E, Part II.

LLC Ownership

You can file just like you are an individual property owner considering that, for income tax uses, a single-member LLC is really a disregarded entity (look above). A multiple-member LLC might choose to be taxed as a partnership or as an S corporation (see above).

Huddleston CPA +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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