What Is IRS Publication 527?
If you're renting out a residential property, you need to know about IRS Publication 527, Residential Rental Property. This IRS document lays out the tax rules for owners like you who generate income from renting homes. You have to report all rental income to the IRS, but how you do it depends on your rental setup. Publication 527 covers depreciation on your property, the deductions you can take against that income, and what happens if you're only renting part of the place.
Key Takeaways
Let me break down the essentials for you. IRS Publication 527 is your go-to guide for handling taxes on rental income from residential properties. The IRS defines rental income to include regular rent, advance payments, fees for canceling a lease, and any expenses your tenant covers. You'll find instructions here on depreciating your property, deducting expenses from your rental income, and dealing with partial rentals.
Understanding IRS Publication 527
Publication 527 has five chapters packed with tax details you need if you're renting out a second home. I recommend you review it before you start renting to understand how the IRS treats your income and what deductions are available. Rental income, as the IRS sees it, covers normal and advance rent, payments to cancel a lease, and tenant-paid expenses.
Take advance rent: that's money paid before the rental period it covers. For instance, if you sign a five-year lease on February 15, 2021, and collect $4,000 for the first year plus $4,000 for the last, you report all $8,000 as income in 2021.
If a tenant pays to break the lease or forfeits a security deposit, count that as rent and report it in the year you get it.
Important Special Rules
Here's something key: if you rent out a place that's your residence for fewer than 15 days in a year, special rules apply. You don't report the rental income, and you can't deduct any related expenses.
Deductions from Rental Income
You might think rental income means pure profit, but tax losses can happen due to interest, depreciation, and more. Normally, renting a second home is passive, so you can't deduct losses. But if you're hands-on—collecting rent, calling repair people, hiring exterminators—you can deduct up to $25,000 in losses.
Deductions include home mortgage interest, mortgage insurance premiums, real estate taxes, depreciation, and usually personal expenses like electricity or exterior painting when they're tied to the rental.
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