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


under 14

more than 14



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 CPAs+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 Allowable Rental Property Expenses: Insurance, Cleaning/Maintenance, and Repairs

You’ll want to ascertain that all expert services and fees are arranged adequately and accurately documented for the objectives of taxation conformity, now that you’ve chosen to lease property for income. In this article, we will name drop a few of these important costs.


Insurance coverage installments are prepaid ahead of the given time period. An illustration here might be: you purchased insurance protection with this particular property on March 2012 for $1200. April 2012 to March 31, 2013 would be the protection lifetime of this plan. Because the policy period does extend past the present tax year, you should apportion and identify the insurance premiums pertinent to the present year only and then bring forward the rest for the next reporting year. In this illustration your allowable premium deduction would be $900 (9 months April to Dec 2012) or $100 per month of eligible rental use.

Personal and business customers can often receive a discounted charge if the insurer is willing to combine their premium plans. Just the company rental property pertinent portion may be deducted. You need to use your personal tax return to deduct any non-business or private utilization. Finally, Title Insurance is not applicable as an expenditure and has to be part of the Cost Basis of the rental property.

Cleaning and Maintenance

The everyday upkeep of the property is a deductible expenditure given it is for common spaces and day to day cleanliness. Still, the expenses will only be deductible if they’re not on personal use days, but are on allowable rental days. To ensure that the property is in great condition and working order, you can try what various other property owners do, and employ a local area hired company to maintain the rental property. This could involve such services as window cleaning, dusting furniture, appliance cleaning and general maintenance. Structural maintenance and modifications are not allowed, so must be included in the property’s Cost Basis.


Once in a while, there might be some necessity to fix an appliance, do a bit of painting, or any other task which does not demand a major renovation of the rental property structure. These expenses that are common and essential are tax deductible depending on the rental length of time.

Don’t incorporate any kind of times which would be considered to be private use times, because costs are only deductible against the income of the property. The only expenses which are authorized are those which are related to the approved rental timeframe, directly.

On the IRS’s webpage, you’ll find various reports you may need. Reference IRS Publication 527 for additional information.

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

Watch this video for more information on Huddleston Tax CPAs:


Deductible Automobile and Transportation Expenses Related to Rental Residences

The use of your own automobiles as well as rentals and local transport may be deducted based on a few particular variables provided these are common and important. If you are incurring travel expenses to maintain and manage your leasing residence, as well as to receive rent payments from residents, you will be allowed to deduct those travel expenditures. Commuting is considered a personal cost which is not deductible. You may not write off the expense of travel to your rental property to make improvements. A cost recovery system such as depreciation will typically take care of this.

Actual Expenses

Most of the expenditures regarding travel connected to owning rental property are reported with this approach. Those expenses need to be documented and backed up by invoices according to IRS Publication 463, Chapter 5. A few software apps are accessible by using iPod, Quick Books, Mint and so on; nevertheless, you still will need to keep a physical document to support any tax deductions. It’s vital that these records be documented, together with supporting documents connected, on the Schedule C or Schedule E. When you’ve got a few properties, your costs will be allotted to the residences where the costs incurred. You should not incorporate any kind of non-business use or any other use except that specifically pertaining to the property.

Mileage Method

You may deduct your actual mileage traveled. For example, if you traveled twelve hundred miles in 2012, you’d calculate costs with the present standard mileage rate of $0.55.5 per mile based on present tax rates and deduct the total.

Working with community transport such as Zip Cars, metro bus companies, and automobile rentals will need to have an immediate connection to the real-estate and must include paperwork to support this. In order to show all public transportation use is completely business connected, it is suggested you keep fare cards. It is also a good idea to keep track of Zip Car and rental car use and allocate those costs to company accounts.

  • You can obtain the different documents outlined in this information on the IRS’s webpage. Consult IRS Publication 527 for more info.

Seattle 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.

Watch this video for more information on Huddleston Tax CPAs:

Important Tax Forms for Reporting Rental Income

This valuable brief article discusses the assorted Internal Revenue Service tax documents you need as a property manager to be able to completely record, and report, your own rental property earnings to the Revenue Service. Depending upon the particular authorized body which manages the rental home, the tax forms required will change, as detailed in this article (individual, partnership, corporation, or LLC). View the article called Best Rental Property Ownership, found in this Guide, to get more information on the subject of legal entity property ownership.

  • Each of the forms outlined directly below are accessible on the IRS’s webpage. The different required forms will likely be available in any tax preparing software applications, should you use one of them.

Individual Ownership

Which includes mutual rental property ownership with a spouse, tenancy in common, or joint tenancy with legal rights of survivorship.

Form 1040. All individual taxpayers must submit Form 1040, so this is where you have to get started. At line 17 of the first page of Form 1040 is the net rental property profits or losses, subject to taxes. Please note that as a law abiding property manager with rental property income and expenses, you will not be allowed to take advantage of the easy Forms 1040A or 1040-EZ.

Schedule E. One addendum to Form 1040 that you must be familiar with is Schedule E. Of its many different applications, just the function of reporting leasing earnings and costs is applicable to your needs. The portion of Schedule E entitled as “Part 1” is the single part you need to complete. Some essential notes to keep in mind: if you ever own the rental mutually with someone else who isn’t your significant other, report about the income that you collected plus the expenses which you incurred. In addition, keep in mind that if you leased for only a part of the calendar year, or you have been leasing a section of your own private property, you will have to distribute expenditures concerning rental and non-rental usage. View the collection of articles entitled Tax Deductible Rental Property Expenses, found inside of this Guide, for additional details.

Form 4562. Form 4562 is needed to quantify depreciation for your property, which you’ll want to deduct at line 18 of Schedule E. For additional information, view the article entitled, Depreciation Expenses for Rental Property, that is in this Guide.

Partnership/Corporate Ownership

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

Form 1065/1120-S. The form a collaboration uses to report all its company activities is Form 1065, that you will need to fill out if you have a partnership. Form 1120-S is utilized by an S corporation to report organization activities. Your current total leasing profits or deficit should be reported on Schedule K, line 2 of Form 1065 or 1120-S (Schedule K is embedded into these forms).

Form 8825. Form 8825 is designed for partnerships and S corporations, and it works just like Schedule E. Schedule E and Form 8852 are basically similar. Ensure that you include total sums of all income and operating costs sustained by the partnership or corporation (these will be allotted to each partner or investor in the future).

Schedule K-1. The total rental property profits or loss attributable to each shareholder or partner is reported by this tax form, according to the rental property ownership interest of each investor or business partner. The details of the K-1 provided to each individual partner should be reported on their Form 1040, Schedule E, Part II.

Limited Liability Company (LLC) Ownership

A single owner LLC is actually a disregarded entity for tax requirements, which means that you can file as if you’re an individual owner (look above). A multiple-member LLC can decide to be taxed either as a partnership or as an S corporation (look above).

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

Deductions for Landlords: The Home Office

There are few deductions taken by business owners that are more dreaded than home office deductions. Some business owners are convinced that claiming this deduction increases the likelihood of an audit, yet the IRS is adamant that this is just not the truth. Either way, if you follow the rules, and maintain proper records, you should have no worries.

The key to this tax deduction is that owners of rental properties may claim this tax write-off if they are active, which is to say you must be doing more than cashing checks. If you regularly spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.

After you’ve met this requirement you will also have to meet the basic home office deduction thresholds. To begin with, you have to use the home office exclusively for your rental business on a regular basis.

Then you’ll also have to meet at least one of the following:

1. This office space must be the principle location from where you manage your business as a rental property manager.

2. You must have no other location from where you run the administrative end of your property managment rental business.

3. This space also serves as meeting location for your clients.

4. You use another structure on your property to conduct business.

After you have applied the threshold tests above and determined that the work area in your home does in fact qualify for the home office deduction, you need to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses only benefit the home office area of your home, expenses such as cleaning or painting. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of the house. Property tax, insurance, mortgage interest, and utilities are examples of indirect expenses. Square footage is the standard system of figuring out the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house with a 200 square foot home office area would mean 10% of the indirect expenses could be deducted as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters when the house is sold.

And you will want to ensure that you are keeping diligent records in case there is an audit. You will need to be able to prove that you were entitled to any deductions. A diagram and/or a photo will support your claim of square-footage ratios. It is wise to have your home office address listed on business cards, letter heads, or other forms of communication. And while using your home office to meet customers, it is wise to keep a log to keep track of meetings. You should keep utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other relevant expense statements.

This topic can get quite complex and the above is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.

Seattle Accountant +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.



Tax Deductible Rental Property Expenses, Part 1

This chapter of the Rental Property Tax Guide centers on the various deductible expenses of your gross rental income so as to figure the net rental income. Given that there is a variety deductible expenses, this Rental Property Tax Guide breaks the topic into four different types. This first part will give attention to professional fee expenses, advertising, and interest incurred.


If you’re renting a room in your home, or if it is a duplex and you’re occupying the other unit, you will need to pro rate the mortgage expense. (See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use). Now if you are renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. Also, if you own only a part interest in the rental, you must multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property.


Ads in the local newspaper or any paid online marketing for example are deductible expenses when promoting a rental property on the open market.

Professional fees

You can deduct professional fees you incur in connection with the rental. For example, if you paid an attorney at law to write a lease, or even to initiate court proceedings to evict a tenant, you may deduct these fees. Additionally, you’ll be able to deduct charges paid to an accountant/CPA for preparing the Schedule E of your tax return from the year earlier. Take care to pro rate the total preparation fee between the Schedule E and the rest of the tax return based upon how much time it took. Any fees for the preparation of any section of the return other than Schedule E have to go on Schedule A as a individual tax prep expense. Finally, in the event that you pay any management fees or commissions to a realtor group for overseeing your rental, then you should deduct these expenditures as well.

Seattle Accountant has written several articles on accounting and other tax related topics. He is a graduate of Washington State University and the University of Washington School of Law.


Startup Expenses and Deductions

Several expenses incurred while preparing a property for rental (before ultimately renting,) are deductible. Let’s have a look at a few.

Note: Startup expenses discussed here, are dissimilar to the expenses allowable as a deduction (in Internal Revenue Code section 195.) Under that section 195, certain expenses incurred as startup expenditures in an active business or trade are deductible up front up to $5,000, with a balance amortizable over a fifteen-year period. However, section 195 does not apply to rental property this is because renting isn’t deemed an active trade or business, but rather a passive activity. See the article titled Tax Deductible Rental Losses, included in this Guide, for a more focused study of passive activity rules.

NOTE: Rental activity starts the moment you make the property available for rent and place it on the market, not when you have actually have a renter or a tenant.

The Expenses in Obtaining a Mortgage

Abstract fees, recording fees, and mortgage fees (amongst others) are capitalized and thus become part of your basis in the rental property. Instead of expensing these fees all at once, you need to depreciate those expenses.


“Points” are charges paid by a borrower to take out a loan or a mortgage. This points or charges may also be called origination fees, or premium charges, or maximum loan charges. Points are essentially prepaid interest. Thus, they are deductible as interest, but you cannot deduct the full amount at once. Rather, you must amortize the points over the life of the loan. Determining the amount of points to amortize per year, is task beyond the scope of this article. Talk with a Seattle CPA.

Repairs versus Improvements

You need to capitalize and depreciate improvements you make to the property before putting the rental property on the market. Improvements prolong the use of the property or materially increase the property’s market value. On the other hand, you may freely deduct all repair expenses. A repair aims to keep your property in good working condition, not to increase the market value or prolong use. Within the Landlord’s Tax Guide there is more on deductions and depreciation, you would like to read further.

Seattle Accountant  has written extensively on accounting and other tax related subjects. He holds a Juris Doctorate and a Masters in Tax Law from the University of Washington’s School of Law.

Rental Property Ownership

Let’s focus on the possible entity types as they relate to the ownership of rental properties. In later articles we will move on to look more microscopically, but for now let’s make sure you are starting from a strong base. You’ll see below the different entity selection types have pluses and minuses. As a guideline, the aim is to limit liability and protect your property from unsecured creditors.

Also consult with an attorney or a certified public accountant well before establishing an entity and transferring ownership of a rental property. Do note, this guide is not a reasonable alternative for expert council.

Note: This landlord tax guide will not serve to replace the qualified council of a certified public accountant or tax attorney. You should seek qualified professional help when setting up an entity and transferring ownership of a rental property.

Individual Ownership

This form of ownership is the more common and the most straight forward form of ownership and occurs when you purchase the rental property in your own name. This includes owning the property with your spouse, or as joint tenants or tenants in common with someone else. The big benefit is that this is straightforward, for one it does not require you to file any complicated paperwork or pay any lofty filing fees. The biggest disadvantage to this kind of ownership is that your creditors may be able to force a sale of the rental property if they attain a court order against you, or force you into involuntary bankruptcy.

Legal Entity Ownership

Legal entities include limited partnerships, general partnerships, limited liability companies, and corporations. Let’s look at the difference a bit later. First how about a look at the leading benefit of entity ownership, that being with entity ownership your personal creditors can’t force a sale of a rental property. The only entity type that does not require registration with the secretary of state is a general partnership. Regarding taxes, the entity type doesn’t matter that much because in most cases rental income is taxed on your personal tax return, or “passes through”, See the article titled “Necessary Tax Forms for Reporting Rental Activity,” which is included in the Landlord Tax Guide.

General partnership. A partnership is an association of two or more people to carry on as co-owners of a for-profit business. Generally partnership, each partner will have equal management rights, and are personally liable for the debts of the partnership. And as regards that liability, a general partnership is in most cases not recommended.

Limited partnership. This entity is more complex than a general partnership because it requires both one limited partner and one general partner. The general partner has sole management rights, coupled with personal liability for any resultant debts. While, the limited partner is not personally liable for debts of the partnership and furthermore has no management rights. This entity selection is generally not recommended.

Limited liability partnership/company. A limited liability company and a limited liability partnership are pretty similar entity types, both provide for limited liability to the partners/members. This would mean that you will not be personally liable for the debts of the entity, except in cases when the debt is caused by your own wrongdoing. This form of ownership is often preferable because of limited liability and additionally there are not as many formalities that require observance than with corporations.

Corporations. This form of ownership delivers limited liability and allows for perpetual existence. Although they also require the observance of special formalities so as to maintain the limited liability guard. Thus for this reason that LLCs or LLPs are generally speaking more apt for your purposes. Also worthy of making note is that corporations fall under one of two types: c-corp or s-corp. When a corporation is taxed as a c-corp, it will pay tax on rental income, and then you will pay tax (again) when the c-corp pays dividends. And it is more desirable to side-step the double-taxation trap.

Seattle Accountant has written many articles covering a broad range of tax and finance topics. He is a graduate of Washington State University and the University of Washington.

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