Owning rental property can be a great way to generate passive income, but it comes with its own set of financial considerations. Understanding the various expenses you can deduct is key to managing your rental business effectively and ensuring you maximize your tax benefits.

1. Advertising: Costs of advertising for tenants, listing rental units, subscriptions for listing websites. 

2. Auto and Travel: Expenses for traveling to the property for maintenance, management, or rent collection. Home to rental or rental intentions won't qualify unless valid home office; would be classified as commuting expense. 

3. Cleaning and Maintenance: Costs for cleaning services and general upkeep. Routine maintenance. 

4. Commissions: Fees paid to rental agents or real estate managers.

5. Insurance: Premiums for property insurance, Mortgage Insurance, Flood Insurance, Umbrella insurance. 

6. Legal and Other Professional Fees: Fees paid for legal advice, accounting services, and property management.

7. Management Fees: Payments to property management companies.

8. Mortgage Interest: Interest paid on loans used to acquire or improve rental property. Be mindful of potential interest tracing related to HELOC loans or cash out refinance interest. 

9. Repairs: Costs of repairing the property (not including improvements, which must be depreciated).

10. Supplies: Items such as cleaning supplies and tools, short-term rental cleaning supplies, paper products, etc. 

11. Taxes: Property taxes and other related taxes.

12. Utilities: Costs of utilities provided to tenants.

13. Depreciation: Deduction for the cost of the property over its useful life.

When it comes to tax reporting for rental properties, you’ll encounter specific forms. Here are the most common ones to be aware of:

• Form 1099-MISC: This form reports any rental income you receive, typically from tenants who pay over a certain amount. However, it may not always match the figures on your Profit and Loss (P&L) report. If there's a discrepancy, it’s generally okay if the 1099-MISC reports a lower amount than what you’ve recorded. Always check for accuracy.
• Form 1098: Provided by your mortgage lender, Form 1098 reports the mortgage interest you’ve paid on your rental properties. This form may also include real estate taxes and property insurance, but if the insurance isn’t listed, you’ll need to request the actual payment amount from your lender or property insurance provider (rather than the annual premium).

Only the interest portion of the mortgage payment is deductible, not the principal repayment. Mortgage interest is reported on Form 1098 provided by your lender.

No, improvements (e.g., adding a new roof, remodeling a kitchen) must be capitalized and depreciated over time. You cannot deduct them in the year they are incurred

Depreciation is a tax deduction that allows you to recover the cost of a rental property over its useful life (typically 27.5 years for residential properties). You claim a portion of the property's cost as an annual deduction.

To minimize taxes on rental income, ensure you're claiming all available deductions such as mortgage interest, repairs, and property management fees. You should find a CPA who can help you identify additional tax-saving strategies, optimize your deductions, and ensure you’re compliant with tax laws. 

Make an appointment with one of our tax professionals today to get personalized guidance and reduce your tax liability.

Real Estate Professional Status (REPS) is a tax designation that allows qualifying individuals to maximize tax benefits from real estate activities. Under IRS rules, taxpayers who meet the criteria for REPS can fully deduct rental real estate losses against their active income, such as wages or business income, rather than being limited by passive activity loss restrictions. This status is particularly advantageous for real estate investors looking to reduce their taxable income.

1.  Material Participation: You must materially participate in real estate activities, such as managing properties, finding tenants, or overseeing repairs. This means being actively involved in the day-to-day operations.

2.  More Than 750 Hours: You must spend more than 750 hours during the tax year on real estate activities.

3.  Majority of Time in Real Estate: More than half of your total working hours in the tax year must be devoted to real estate activities.

• Tax Savings: Allows you to offset rental property losses against other income types, lowering your overall tax liability.
• Maximized Depreciation: You can fully utilize depreciation, including bonus depreciation, to reduce taxable income.
• No Passive Activity Loss Limits: Unlike other taxpayers, those with REPS aren’t subject to the $25,000 passive loss offset cap.

• It’s Not a Business Entity: REPS is a tax designation, not a business structure or license.
• It’s Not Just for Realtors: Any taxpayer involved in real estate activities can qualify, including property managers, landlords, and investors.

REPS is most beneficial for individuals or families with significant real estate holdings and high taxable income from other sources. For example, a high-income earner with multiple rental properties could use REPS to significantly lower their taxes.

To qualify for Real Estate Professional Status (REPS), a taxpayer must meet two key conditions:

1. A Taxpayer must spend more time on a Real Property Trade or Business than any other(s). (ex: a w2 job, other business, etc) 

2. A Taxpayer must spend at least 750 hours during the year on real estate activity.

Many people think they only need the 750 hours, and don’t realize they 

also can’t spend more time on any thing else. 

For example, If a taxpayer has a full-time job that takes 2,050 hours a year, their 

real estate activity would need to have at least 2,051 hours of time.

No. One spouse alone must meet the test of 750 + Hours & More time than any other activity

Yes. If you qualify for REPS, rental real estate losses can offset income from W-2 wages, self-employment, or other active income sources, significantly reducing your taxable income.

The IRS may audit your claim for REPS. You must provide detailed records of your hours worked and demonstrate material participation in real estate activities.

It’s possible, but your own hours working in real estate must meet the criteria. If you delegate most tasks to a property manager, you may not have enough qualifying hours to satisfy REPS.

No. Real estate agents still need to meet the 750-hour and majority-time requirements to qualify.

No, REPS must be requalified for each tax year. Failing to meet the criteria in subsequent years will result in rental losses being classified as passive.

The IRS recognizes the following real estate activities:

• Property development or redevelopment
• Construction or reconstruction
• Acquisition, conversion, or rental operations
• Property management
• Real estate brokerage

Excludes Mortgage Brokers Specifically. And Excludes services provided as an employee of a qualifying business 

unless also 5% owners

Material Participation is a key tax concept defined by the IRS to determine whether a taxpayer is actively involved in a trade, business, or rental activity.

Qualifying for Real Estate Professional Status does not by itself make losses deductible. 

Qualifying for REPS gives the taxpayer the benefit of their rental losses being classified as NON-PASSIVE. 

However! 

They must still Materially participate in the activities to be able to deduct those losses.

If you do not materially participate, your rental losses will still be classified as passive and subject to passive activity loss limitations.

The IRS requires both REPS and material participation to fully unlock the tax benefits of deducting rental losses.

The following activities may qualify:

• Advertising or finding tenants
• Meeting or negotiating with tenants
• Arranging for or performing repairs
• Supervising contractors
• Collecting rent
• Bookkeeping or recordkeeping

To establish material participation, you must meet at least one of the following IRS tests for the tax year:

1. 500-Hour Test: You work 500 or more hours in the activity during the year.

Example: Spending over 500 hours managing your rental properties.

2. Substantially All Participation Test: You are the only person, or the person who performs the vast majority of the work in the activity.

Example: If you manage a property without hiring a property manager, contractors, or significant third-party assistance.

3. More Than 100-Hour and Most Significant Participation Test: You work at least 100 hours in the activity, and no one else works more hours than you do.

Example: You handle the primary duties for your real estate activity, even if others assist with smaller tasks.

4. Aggregate Participation Test: The total time you spend on multiple activities exceeds 500 hours, and you can group related activities.

Example: Managing several rental properties where combined participation adds up to 500+ hours.

5. Material Participation in 5 of the Last 10 Years: You materially participated in the activity for any 5 out of the last 10 years.

Example: A rental property you’ve been actively managing for most of the past decade.

6. Personal Service Activity Test: If the activity is a personal service business (e.g., a property management company), you must materially participate in the current or any prior 3 years.

7. Facts and Circumstances Test: You participate in the activity on a regular, continuous, and substantial basis, even if no specific hourly threshold is met.

Example: You provide evidence that your involvement was critical to the operation’s success.

1. Spouse's Hours Count for Material Participation

If you file a joint tax return, the hours your spouse spends working on a real estate activity count toward material participation, even if your spouse does not qualify as a Real Estate Professional.

Example: If you work 400 hours managing rental properties and your spouse works 200 hours, your combined hours total 600 hours for material participation purposes.

2. Spouse's Hours Do Not Count for REPS Qualification

To qualify for REPS, only your personal hours are considered. Your spouse's hours cannot be used to help you meet:

• The 750-hour requirement, and
• The rule that more than 50% of your personal working time is spent in real property trades or businesses.

If both spouses individually meet REPS, they can both qualify on a joint return, but this is uncommon.

• Working on repairs or construction at the property
• Hiring and managing a general contractor or handyman for the property
• Communicating with tenants
• Acquisition of a property, e.g. time spent searching for a property you do purchase
• Most activities that a property management company would handle
• Direct Management of the properties 
• Standard amounts of bookkeeping/ reporting/ office work 
• All hours required to allow the properties to operate normally 

A Taxpayer can’t count their hours in the activity as participation hours

 if BOTH of the following are true:

• The work isn’t work that’s customarily done by the owner of that type of activity
• One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules

Other Non-qualifying Hours would Include: 

-  Investor Hours

• Studying and reviewing financial statements or reports on operations of the activity, 
• Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and 
• Monitoring the finances or operations of the activity in a nonmanagerial capacity.

-  Real estate education

-  Unsuccessful acquisition, e.g. time spent searching for a property you do not purchase

-  On-call hours where no work is actually performed

A short-term rental (STR) is a fully furnished property rented on a nightly basis, typically for less than 30 days, with most stays averaging around seven days or fewer. Popular among real estate investors, STRs are one of the most profitable rental strategies. However, they require considerable effort to manage, including marketing, guest communication, and upkeep, making them a dynamic yet rewarding investment option.

Yes, income from short-term rentals is taxable and must be reported on your tax return. This includes payments received through platforms like Airbnb, VRBO, or direct bookings.

You can rent your primary home for up to 14 days a year, and that rental income is TAX FREE. 

It depends. If your STR operates as a business (e.g., you provide substantial services like cleaning during stays, meals, or concierge services), the income is typically subject to self-employment tax. Otherwise, it's treated as passive income and isn't subject to self-employment tax.

You must divide expenses between rental and personal use based on the number of days rented versus days used personally. Only the rental portion of the expenses is deductible.

Depreciation allows you to deduct a portion of the cost of the property and improvements over time. Residential rental properties are depreciated over 27.5 years, but if you later sell the property, you may face depreciation recapture taxes.

Cost segregation is a tax strategy used by property owners to accelerate depreciation deductions on certain components of a property. It involves breaking down the costs of a property into different categories, allowing you to depreciate parts of the property over a shorter period (such as 5, 7, or 15 years) rather than the typical 27.5 or 39 years for residential and commercial real estate, respectively.

An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains attributable to those trades or businesses plus a threshold amount adjusted for cost of living.

For 2024 Tax Year Those Limits are:

$305,000 if Single 

$610,000 Married Filing Jointly

Rental income is taxed as ordinary income, meaning it is added to your other taxable income (like W-2 wages or business profits). The tax rate depends on your marginal tax bracket. However, you can offset rental income with allowable expenses and depreciation.

If your expenses (including depreciation) exceed your rental income, you will have a rental loss.

• By default, rental losses are considered passive losses and can only offset passive income.
• If you meet the criteria for active participation, you may deduct up to $25,000 of passive losses against other income, subject to MAGI limits.
• Qualifying as a Real Estate Professional and materially participating can make losses non-passive, allowing them to offset other income without limitations.

Yes, expenses incurred while the property is vacant are deductible as long as:

• The property is available for rent, and
• You are actively trying to rent it (e.g., advertising, showing it to tenants).

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