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Tax Tips for Accidental Landlords

January 22, 2016

Tax Tips for Accidental Landlords

IRS forms

Did you become a landlord this year by accident? Unforeseen circumstances like job relocation, downsizing, or home inheritance may have put you in this category. Now that tax season is underway, the Internal Revenue Service won't see your "accidental landlord" status as an accident. In fact, if you rent any space for 15 days or more, you'll need to report your rental property and earnings on your federal income statement, according to the IRS.

Here are three tips to help steer you in the right direction as you file your taxes as an "accidental landlord" this year.

  1. Gather Records of Your Income and Expenses

    Record your rental income earnings from the prior year and all cash-related expenditures on the property on IRS 1040 Form Schedule E. Things like property taxes, energy costs, association fees, maintenance, legal fees (if a lawyer drafted your rental contracts), ad costs to rent the space, and repairs are now deductible because your home is a rental property and not a personal residence. In recent years, there's been an increase on rental property audits,1 so be sure you have receipts and proper documentation to support your deductions in case you're audited.
  2. Exclude Security Deposits

    If you have a hefty deposit that was returned during the taxable year, don't forget to leave that out of your statement.
  3. Take Depreciation

    Tax pros who have real estate experience may be able to help you calculate your annual allowance for wear and tear. Taking depreciation helps offset any drop in property value.The IRS states that if you meet the following requirements below, your property is eligible for depreciation:
    • You own the property.
    • You use the property in your business or income-producing activity (such as rental property).
    • The property has a determinable useful life.
    • The property is expected to last more than one year.

Be sure to consult with a tax professional as each property and landlord situation is different. A study by the Government Accountability Office shows that about 25% of rental property owners over-reported their net income from rental real estate — you don't want to be part of that statistic!