Deductible Rental Expenses

You can deduct rental expenses up to the gross rental income limitation, which is your gross rental income minus the rental portion of:

• Mortgage interest
• Real estate taxes
• Casualty losses
• Rental expenses like realtor fees and advertising costs

If your rental expenses exceed the gross rental income limitation, you may carry forward the excess expenses to the next year, subject to the same limitation.

If you itemize deductions on Schedule A (Form 1040), you can still deduct the personal portion of:

• Mortgage interest
• Property taxes
• Casualty losses from federally declared disasters

Let’s say you own a vacation home that you rent out for 180 days at a fair rental price and use personally for 20 days. Your total expenses for the year are $30,000, including $10,000 in mortgage interest, $5,000 in property taxes, and $15,000 in other rental expenses.

Allocate Expenses

 

• Rental use: 180 days / 200 total days = 90%
• Personal use: 20 days / 200 total days = 10%

Deductible Rental Expenses

 

• Mortgage interest: $\$10,000\times 90\%=\$9,000$
• Property taxes: $\$5,000\times 90\%=\$4,500$
• Other rental expenses: $\$15,000\times 90\%=\$13,500$
• Total rental expenses: $\$27,000$

Gross Rental Income Limitation

 

• Assume gross rental income is $25,000.
• Deductible rental expenses: $25,000 (gross rental income) - $9,000 (mortgage interest) - $4,500 (property taxes) = $11,500 available for other rental expenses.
• Since $13,500 exceeds $11,500, you can only deduct $11,500 of other rental expenses this year and carry forward the remaining $2,000 to the next year.

Personal Expense Deductions

(if you itemize deductions)

• Mortgage interest: $\$10,000\times 10\%=\$1,000$
• Property taxes: $\$5,000\times 10\%=\$500$
• Total personal deductions: $1,500

For more information on offering residential property for rent, refer to IRS Pub. 527, “Residential Rental Property”.