Rental Properties

• Whether you're incorporated or privately renting a property, the IRS treats your rental as a business venture for tax purposes. Because of this, you must report all rent and other income as ordinary income on your Form 1040, although you're granted a much larger amount of leeway when it comes to claiming deductions. These include mortgage interest, repairs and maintenance made on the building, property taxes, insurance costs, utilities and other miscellaneous costs such as legal fees and advertising. These costs are deducted against rental income when calculating your tax basis.
  
  

Depreciation on Rentals

• In addition to deductions on your rental, the IRS also allows you to claim depreciation on the building, most appliances and some types of landscaping. Depending upon the type of asset and the IRS' expectation of its useful age, you'll be allowed to claim a portion of the item's cost, including that of the building, each year over the lifespan of the asset. The amount you may deduct for depreciation varies on the item's value, its lifespan and the depreciation model, straight-line or the modified accelerated cost recovery system, you use to track depreciation.
  
  

Renting a Former Residence

• The IRS allows homeowners an exemption on gains on property if they live in a home two of the five previous years, so if you intend to sell a rental property that once served as your primary residence, you'll have three years of rental time before you forgo the gains tax exemptions. For individual filers, you may avoid paying gains taxes on $250,000 in gains, while married couples are exempt from gains taxes for the first $500,000 in appreciation, so the exemption may provide a sizable tax break if your property's value increased dramatically from when you purchased it.
  
  

Vacation Homes

• If you own a vacation home and sporadically rent it, your situation may be a little more complicated. If you rent the property for fewer than 14 days a year, you don't have to claim the rent as income, and essentially receive it free of taxes. If you rent it more than two weeks a year, you must claim rent as income, though you may also claim expenses and depreciation to offset that income. Your vacation home may still qualify for the mortgage-interest deduction as a personal home; if you use it at least 14 days a year or 10 percent of the days its rented, whichever is more, you may claim the mortgage interest as a personal residence deduction.