Deductions on Expenses

• Any expenses you directly pay that relate to maintaining a property which is rented to a family, or anyone else, can be deducted and can also exceed your gross rental income, says Aleksandra Todorova of Smart Money. You can deduct upkeep which includes general maintenance to the property or repairs to the rental’s utilities. You can also deduct your property taxes as well as mortgage interest payments. Even liability and fire insurances can be deducted. If you have to travel to the rental property to collect the rent, transportation costs can also be deducted, adds the Internal Revenue Service. The IRS says travel expenses are figured using a standard mileage rate, which was 50 cents per mile in 2010.
  
  

Depreciation Deduction

• The IRS allows you to use depreciation on your rental property as a deduction. This is figured by taking the worth of your rental home and dividing it by 27.5. After dividing, the figure you get is the amount of your annual deduction. But Smart Money states that investing in items to improve your rental home can’t be deducted, though depreciation on those items can. The IRS uses various depreciation calculation methods for these items. This includes the Modified Accelerated Cost Recovery System for rental property put into service after 1986. For example, using MACRS, appliances and office equipment can be depreciated over five years.
  
  

Living in the Rental Home

• A situation may arise where you decide to live in the rental home while the family renting it is away. This can affect your tax deductions depending on how long you live in the home. If you live in the home for the greater of 14 days or 10 percent of the total days you’re renting to the family, it’s considered to be personal use by the IRS. You can still deduct rental expenses, but only for the days you rented the home. However, the IRS says you can’t deduct the expenses if they exceed your gross rental income. You may be able to deduct things like mortgage expenses if you itemize your deductions on your 1040 Schedule A form.
  
  

Reporting Deductions

• When you report your rental home expenses, you simply report it on both your 1040 form and, in more detail, on the 1040 Schedule E form. The Schedule E is titled Supplemental Income and Loss. In Part I, list the type and address of your rental property, plus income and expenses. In Part II, list income or loss from partnerships and S corporations. For Part III, you report your income or loss from estates and trusts. Part IV is for income or loss from real estate mortgage investments. Figure your totals in the summary section in Part V.