In this article, learn how to report rental income on your Schedule E, file an expense report for your rental real estate business, and where you can limit your income tax liability. Find out which business expenses qualify for a deduction on your Schedule E. And, learn everything you need to know about determining your total income gain or loss.
Expense Report for Real Estate Rentals: Which Expenses Qualify?
Schedule E specifies your gross rental income from each of your pieces of property. Your gross income includes all money received from your rentals for the taxable year. This includes monthly rental payments, prorated rent payments, and utility reimbursements.
When it comes to limiting your income tax liability for rental income, it comes down to your rental income less what the IRS allows you to deduct. The IRS allows you to claim expenses associated with your business activity, which include…
Advertising, Auto, and Travel Expenses
On your business expense report, including all of your advertising expenses. Deduct expenses for physical marketing materials, like business cards, flyers, billboards, and yard signs. And, your business can deduct the cost of digital advertising, website development, and business collateral design.
The list of auto and travel expenses that you can deduct on your Schedule E expense report has some limitations. Expenses like hotels, mileage, and meals are deductible. Keep in mind, 50% of the cost of your travel meals, and any expenses for expanding your business to a new location is ineligible.
Cleaning and Maintenance Expenses
Include any expenses incurred for maid services or cleaning fees associated with the move-out of a tenant. Also, claim all maintenance expenses for individual units, as well as the building. On your expense report, these can include – but not be limited to – painting, appliance work, equipment, and building upkeep, and landscaping.
Commissions, Insurance Fees, and Legal Fees
If you pay commission to a third-party agent that assists in filling your rental vacancies, include these expenses on your Schedule E. When it comes to fees for insurance, exclude fees that you pay into escrow, and only include money paid to your insurance company. Qualified insurance expenses include hazard, homeowners, and flood insurance.
Include any expenses your business incurs from legal fees or attorney fees and accounting services. And, expenses from the financial planning or management services for your real estate rentals qualify as deductions on your business expense report. This includes anything you spend on hiring a property agent or manager, as well as special services hired by your property manager.
Mortgage Payments, and Interest Payments
To determine your deductible mortgage and interest payment expenses, you need to look at your IRS Form 1098, or contact your financial institution. You need the total amount of interest paid to the bank over the taxable year. Other payments you can claim in your expenses include interest paid to investors, businesses, relatives, or digital crowdfunds.
Any third party, to whom you pay interest, must receive an IRS Form 1099 that specifies the dollar amount of interest paid. As the property owner, you are responsible for providing these third parties with a 1099.
Repairs, Supplies, and Miscellaneous Materials
If you have made any repairs to your real property over the taxable year, including the expense on your report. These expenses exclude, however, capital improvements. In general, qualified expenses include small repairs and De Minimis Safe Harbor expenses under $2,500.
Also, include the cost of miscellaneous materials and supplies. These can include expendable resources such as printer paper, hardware and small tools, and more.
Taxes and Utility Expenditures
Naturally, you want to include tax expenses from owning your real estates, like property tax, school district tax, and land tax. Remember, you are declaring income, so don’t include your income tax on your business income expense report. Utility costs, however, qualify as a business expense.
The objective is to offset the expense you incur against the income you receive. So, include expenses you incur from utility payments which are, or are not reimbursed to you. Exclude on-time payments that a tenant makes since you do not incur any expense.
Expenses Associated with Depreciation and Other Expenses
On Schedule E, you already have determined your depreciation expenses. Include the figure for your depreciation on your expense report. This figure is important to get right, so consult a tax advisor for help determining your depreciation expense.
Apart from small supplies, include other expenses you incur in the normal operation of your rental property. These expenses include but are not limited to, subscription costs, books, bank fees, educational expenses, meals, entertainment related to business, and gifts to clients or renters. Each of your “Other” expenses should be itemized separately on a single page.
Determining Your Income Gain or Loss on IRS Schedule E
Report your total income gain or loss on your IRS Schedule E. Take your expenses out of your net rental income to find your total taxable income. Do this for each property to determine your annual income gain or loss.
If you take a loss on the property, it may be subject to Passive Activity Loss Rules. Review Passive Activity Loss Rules for reporting on IRS form 8582, and watch the next post on deducting qualified business income from rental properties. And, don’t hesitate to consult a tax advisor to make sure your schedule E expenses are reported correctly.