Long-term rentals without substantial services are one of the simplest real estate investments to handle at tax time. They are usually passive activities, reported on Schedule E and free of self-employment tax. This guide covers the tax advantages of long-term rentals and the limits to watch.
Reporting long-term rentals on Schedule E
You report income and expenses from long-term rentals on Schedule E, Supplemental Income and Loss. Because you mainly handle leasing and upkeep, rather than daily guest services, reporting stays fairly simple.
No self-employment tax
Rental income from long-term rentals without substantial services generally isn’t subject to self-employment tax. As a result, you avoid the 15.3% Social Security and Medicare tax that business owners pay. For landlords with several properties, the savings can be large.
Deductions for long-term rentals
Landlords can deduct many costs, including:
- Mortgage interest on loans for the rental.
- Property taxes on the rental.
- Operating costs, such as insurance, utilities you pay, management fees and advertising.
- Repairs that keep the property in good condition.
- Depreciation of the building and improvements, but not the land. Residential rental buildings are depreciated over 27.5 years.
Why depreciation matters
Depreciation lowers your taxable income each year, even though you don’t spend cash on it. However, when you sell, you may owe tax on the depreciation you took, at a rate of up to 25%. So it mainly defers tax rather than eliminating it.
Limits on rental losses
Long-term rentals are generally passive activities. So rental losses can usually offset only passive income. Any unused losses carry forward to future years, and you can use them when you sell the property.
However, there is an important exception. If you actively participate and your modified adjusted gross income is under $100,000, you can deduct up to $25,000 of rental losses against other income. The allowance phases out between $100,000 and $150,000. In addition, real estate professionals may avoid the passive limits entirely.
Keep good records
Track income, expenses and improvements for each property. For the full rules, see IRS Publication 527, Residential Rental Property.
Get help with your long-term rentals
We help landlords claim every deduction and plan around the passive loss rules. To discuss your rentals, call (415) 842-2940 or book a free 15-minute call.