Call us Contact

Tax on Rental Income

Is My Rental Property Considered a Business?

Is My Rental Property Considered a Business?

“I have a rental property. Can I write off business expenses or losses against my personal income?”

We get many questions about rental property, particularly, “How can I report my rental property as a business so I can write off my losses against my personal 1040 adjusted gross income?”

Several IRS factors determine whether you can claim your rental property as a Schedule C business or a Schedule E. The primary factor is whether you’re providing substantial services to your rental guests regularly.

Understanding Passive Activity

A passive rental typically occurs when someone owns a rental that is leased for more than seven days at a time or if the operations are managed by a property manager. These are the two most common tests, though not the only ones, that the IRS uses when reviewing a taxpayer’s return.

🏡 Passive Income from Your Rental Property

Generally, most rental profit and loss are considered passive, and a Schedule E is filed. If your rental shows a taxable loss, as a passive taxpayer, you can only deduct this loss against other passive income—not against your W2 wages or investment income. This is why many taxpayers hope to classify their rental real estate as a Schedule C business to offset losses against their W2 income.

❓ What Does the IRS Consider for My Rental to Qualify as a Business?

The IRS looks at whether the property you’re renting qualifies as a “business” by determining if you provide substantial services in conjunction with your rental.

Insubstantial Services

Some activities don’t count as “substantial services” and will typically require you to file under Schedule E on your personal tax return. These include:

  • ✅ Providing basic utilities (heating, lighting, internet, etc.)
  • ✅ Basic cleaning of common areas and grounds
  • ✅ Trash services
  • ✅ Paying bills and tracking income and expenses
  • ✅ Performing your own repairs and maintenance

If these are the primary services you provide, your rental is likely considered passive, and you’ll file a Schedule E.

Substantial Services

On the other hand, if you’re providing services similar to those of a hotel, your rental may qualify as a business under Schedule C. These services might include:

  • ✅ Regular cleaning services for guests
  • ✅ Changing linens during a guest’s stay
  • ✅ Offering tours, outings, or concierge-type services
  • ✅ Physically preparing meals for guests
  • ✅ Providing guest transportation

These services indicate that you’re operating a business, allowing your rental property to be classified under Schedule C.

❓What If You Provide Services to Your Guests?

Let’s say your rental property is a small bed and breakfast, and the average stay is less than seven days. If you’re providing substantial services like daily cleaning and meal preparation, you may be able to file as a Schedule C business. This can mean taxable rental profits are subject to self-employment tax, but it also allows you to deduct rental losses against W2 income, potentially lowering your overall taxable income.

For longer-term rentals (over seven days or month-to-month), or if you rent a room in your main residence, the IRS generally considers these passive activities. In this case, your rental would be classified as passive, and losses can only offset other passive gains.

💡 So… Can I Claim My Rental Property as a Business for Tax Purposes?

Whether you’re a casual renter or the owner of multiple rental units, most rental property owners are surprised to learn they can’t claim their rental real estate as a Schedule C business unless substantial services are being provided. The IRS sets a high bar for taxpayers looking to offset losses, so it’s crucial to understand the rules.

✅ Stay on the Right Side of the IRS

Navigating the IRS rules for rental real estate can be complex, and there’s a lot at stake. Keeping your rental activity compliant is essential to avoid audits and penalties. Make sure to classify your rental correctly—whether it’s passive or active—so you can maximize your tax benefits.

Our founder has over 15 rental properties, so we understand the complexities firsthand. At Insogna CPA, we help clients navigate the rules of rental property taxation, ensuring you’re making the most of your rental real estate. Reach out today to see how we can help you maximize your profits while staying on the IRS’s good side.

Call Us Now
Ask A Question

Top 4 Rental Property Questions Answered

Blog Preview 2024 09 19T173117.560

Here are four key questions (and answers) to help you make smart, well-informed decisions about your rental properties, ensuring your real estate investment pays off.

❓ How should you handle rental expenses?

There are several considerations you need to examine in order to determine the best way to handle your rental expenses for tax purposes. It is not a matter of choice, however; the proper treatment is determined by the activities you perform. If you personally participated in the management of the property, then it is a matter of whether the property is subject to the vacation home rules.

❓ Is your rental property non-taxable?

Yes or No

❓ Vacation Home Rules

  • ✅ If yes, and your allocable rental expenses exceeded your rental income, see the rules for Expense Limitations.

Rules for Determining Selection

📌 Non-Taxable Rentals
If you casually rent out your personal home for 14 days or less during the year, it’s non-taxable. That means any related expenses can’t be deducted. However, you can still claim qualified mortgage interest and real property taxes as itemized deductions on Schedule A.

📌 Non-Personal Use
If neither you nor your family used the rental property, then good news—qualified rental expenses are fully deductible. Depending on your situation, you’ll either report them as a Schedule C business or on Schedule E of your Form 1040.

📌 Expense Limitations Due to Rental Use
Things can get tricky here. How much you can deduct depends on how much time you rented the property, how often you used it personally, and the size of the rented area. Use the following formulas to calculate the rental use percentage:

Days Rented % = (Rental Days) ÷ [(Rental Days) + (Personal Days)]
Area Rented % = (Square Footage Rented) ÷ (Total Square Footage)
Rental Use % = (Days %) x (Area %)

If your property falls under the vacation home rules and your rental expenses surpass your rental income, be sure to read the next rule, which covers the limitations when expenses exceed income.

📌 Expenses Limited Due to Exceeding Income
When your rental expenses exceed rental income, the IRS steps in with further limitations. Essentially, you can’t claim a taxable loss through depreciation. If your qualified mortgage interest and property taxes balance out the rental income, you won’t be able to write off operating expenses or depreciation. The silver lining? You may be able to carry forward any excess losses into future years.

 ❓What are my tax withholding responsibilities?
If you rent through a third-party platform (like Airbnb or VRBO), make sure they have your tax ID or Social Security Number to collect state and federal tax withholdings. If you skip this step, you could end up paying that amount later, potentially with penalties if your income exceeds IRS estimates. The third party will send you a 1099-K, showing your earnings and any taxes withheld.

❓ How does my LLC report in a non-community property state?
If the property is held in LLC that you and your spouse are both members of and you do not live in a community property state, you will be required to file a Form 1065 partnership return to report your rental activities.

💡 Parting Thoughts
Whether you’re casually renting out a home or managing multiple rental properties, the tax rules can be complex, and unfortunately, it’s rare that you’ll be able to fully deduct your expenses without proving significant involvement. The bar is high for tax write-offs, but understanding your options can help you make the most of your real estate investment.

Need some help navigating the tax rules for your rental properties?

Reach out to us today—let’s make sure your rental property is working for you, not the other way around.

Call Us Now
Ask A Question

Short-Term Rentals and Taxes Explained in 2024

Short-Term Rentals and Taxes Explained in 2024

These special (and sometimes complex) taxation rules are based upon the length of time you rent your property out and with varying tax outcomes. In some situations, the rental income may be tax-free. In other situations, your rental income and expenses may need to be treated as a business, as opposed to a rental activity. The following is a general synopsis of the rules governing short-term rentals (those rented for average rental periods of 30 days or less).

📌 Rented for Fewer Than 15 Days During the Year

When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A.

💡 The 7-Day and 30-Day Rules

Rentals are generally passive activities.

However, an activity is not treated as a rental if either of these statements applies:

  1. 1️⃣ The average customer use of the property is for 7 days or fewer—or for 30 days or fewer if the owner (or someone on the owner’s behalf) provides significant personal services.
  2. 2️⃣ The owner (or someone on the owner’s behalf) provides extraordinary personal services without regard to the property’s average period of customer use.

If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated interest and taxes, will be reported on Schedule C instead of Schedule E, the IRS form used to report longer-term real estate rentals. IRS Publication 527 states: “If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C.” Substantial services do not include furnishing heat and light, cleaning public areas, collecting trash, and such.

💡 Exception to the 30-Day Rule

If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.

💵 Profits and Losses on Schedule C

Profit from a rental activity is not subject to self-employment tax, but a profitable rental activity that is reported as a business on Schedule C is subject to this tax.

A loss from this type of activity is still treated as a passive activity loss unless the taxpayer meets the material participation test – generally, providing 500 or more hours of personal services during the year or qualifying as a real estate professional.

Losses from passive activities are deductible only up to the passive income amount, but unused losses can be carried forward to future years. A special allowance for real-estate rental activities with active participation permits a loss against nonpassive income of up to $25,000 – but phases out when one’s modified adjusted gross income is between $100K and $150K. However, this allowance does NOT apply when the activity is reported on Schedule C.

Rental Property Tax Help

Navigating the tax rules for short-term rentals can feel overwhelming, but you don’t have to do it alone. Reach out today, and we’ll work with you to ensure you’re maximizing the tax benefits for your rental property and avoiding any costly surprises. Let us help you turn those short-term rentals into long-term wins for your finances in 2024!

Call Us Now
Ask A Question

What Real Estate Investors Need to Know in 2024: Smart Moves for Your Property Investments

What Real Estate Investors Need to Know in 2024: Smart Moves for Your Property Investments

Real estate investing can enhance the risk-and-return profile of your portfolio, offering competitive returns. But let’s be honest—without proper guidance, navigating property investments can feel like you’re wandering in the dark. Don’t worry, though. We’ve got your back with some practical tips and insights to keep you on track in 2024.

Check out these must-read articles for real estate investors:

Need Help?

Whether you’re new to real estate investing or a seasoned pro, navigating the tax landscape can make or break your returns. Don’t go it alone—reach out to us today, and let’s maximize your property investments together!

Call Us Now
Ask A Question

Rental Property Tax Deductions for Landlords

Rental Property Tax Deductions for Landlords

Many of our clients own rental properties, whether as their main business or part of a diverse entrepreneurial portfolio. At Insogna CPA, we specialize in helping property owners maximize their rental property tax deductions and reduce tax burdens with strategies that work.

Insogna CPA: Your Rental Property Tax Experts

Our deep knowledge and personal experience with real estate taxes for rental properties is an assurance that our team is up-to-date on every tax-advantaged strategy available to owners, including: 

In fact, our founder and CEO, Chase Insogna, a licensed CPA, personally owns several rental properties.

Key Rental Property Tax Deductions to Consider

Depreciation is often the first deduction rental property owners think about, but it’s far from the only one. Here’s a quick rundown of other valuable tax breaks available for landlords in 2024:

  • 📌 Advertising costs for listing the property
  • 📌 Auto expenses for property-related travel
  • 📌 Cleaning & maintenance fees
  • 📌 Management fees for overseeing the property
  • 📌 Supplies needed for property upkeep
  • 📌 Taxes such as property taxes
  • 📌 Utilities like water, gas, and electricity
  • 📌 Property & liability insurance
  • 📌 Mortgage interest, typically reported on Form 1098
  • 📌 Repairs, whether it’s fixing a leaky roof or repairing appliances
  • 📌 Legal & tax preparation fees tied to rental activity
  • 📌 Non-mortgage interest, such as interest on a credit card used solely for property expenses
  • 📌 Travel expenses for overnight trips to improve your property

Maximize Your Rental Property Tax Deductions in 2024

Ready to keep more of what you earn as a landlord? Let us guide you through every available deduction to maximize your rental property tax savings this year. Schedule a call with us today, and let’s make sure you’re not leaving money on the table.

Call Us Now
Ask A Question

Rental income and expenses – Real estate tax tips

Rental income and expenses – Real estate tax tips

Many taxpayers, from short-term vacation hosts to long-term landlords, often wonder how to handle the income from renting their home or investment property. They may think their rental losses can be treated as a business expense, allowing them to file a Schedule C and reduce their taxable income.

However, this isn’t always the case. To report your rental property as a business, the IRS requires that you “materially participate” in managing the property. They have specific tests to determine if your activity is passive or active.

❗Your Home is (Probably) Not a Business

If you rent your home to short-term rentals for more than 14 calendar days, you will be required to report this rental income on your 1040 tax return.

If you used a rental app or website as an agent for the rental, you may receive a Form 1099-K. Be aware that the amount you report on the 1099-K form is the gross amount and is exclusive of any refunds, adjustments, or service fees that may have been charged.

The good news is that these charges may be used as deductions on your tax return unless they are deemed to be non-taxable exceptions. Refunds, service fees, and adjustments are not included in the gross amount. These differences will be accounted for as deductions on your tax return.

The devil in all this is in the details. High-net-worth individuals looking to find big write-offs from renting their home will discover there are some complex conditions their rental activities must meet to be a deductible opportunity.

💡Understanding Your Tax Return and Rental Property

Rental income is reported based on the activities associated with your property. For short-term rentals, there are typically three categories:

  • ✅ Non-taxable rentals
  • ✅ Schedule C rentals
  • ✅ Schedule E rentals (Most rentals fall under this category).

Let’s break it down:

❓Did you stay at the property this year?

📌 Non-Taxable Rentals

Sometimes, people rent out their home for just a few days. In this case, your rental might not be taxable, even if you earned a significant amount. If the property was used as your residence and rented for less than 14 days, the rental income isn’t subject to tax—this is known as the “Augusta Rule.” However, property taxes and mortgage interest can still be deducted on Schedule A.

📌 Schedule C Rentals

Owners who provide what the IRS considers substantial services for guests in their rental qualify to report their income and deductions as a Schedule C business. However, as a Schedule C business, the taxable profits derived from this rental activity will also be subject to self-employment tax.

📌 Schedule E Rentals

When the property owner does not provide what the IRS determines to be substantial services to their rental guests, rental income should be reported on Schedule E on their 1040. Taxable profits from a Schedule E are not subject to self-employment tax, and losses are limited to higher income earners based on the IRS limits for adjusted gross income.

Need Help?

If you’re still unsure about how to report rental income or maximize deductions, we’re here to help. Give us a call today, and we’ll make sure you’re on the right path to optimizing your rental property’s tax impact.

Call Us Now
Ask A Question

© 2022 Insogna CPA PC. All rights reserved​.

Credits