For the latest information about developments related to Pub. 527, such as legislation enacted after it was published, go to IRS.gov/Pub527.
Standard mileage rate. For 2023, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck increased to 65.5 cents a mile.
Section 179 deduction dollar limits. For tax years beginning in 2023, the maximum section 179 expense deduction is $1,160,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,890,000.
Qualified paid sick leave and qualified paid family leave payroll tax credit. Generally, the credit for qualified sick and family leave wages, as enacted under the Families First Coronavirus Response Act (FFCRA) and amended and extended by the COVID-related Tax Relief Act of 2020, for leave taken after March 31, 2020, and before April 1, 2021, and the credit for qualified sick and family leave wages under sections 3131, 3132, and 3133 of the Internal Revenue Code, as enacted under the American Rescue Plan Act of 2021 (the ARP), for leave taken after March 31, 2021, and before October 1, 2021, have expired. However, employers that pay qualified sick and family leave wages in 2023 for leave taken after March 31, 2020, and before October 1, 2021, are eligible to claim a credit for qualified sick and family leave wages in the quarter of 2023 in which the qualified wages were paid. For more information, see Form 941, lines 11b, 11d, 13c, and 13e; and Form 944, lines 8b, 8d, 10d, and 10f. You must include the full amount (both the refundable and nonrefundable portions) of the credit for qualified sick and family leave wages in gross income on line 3 or 4 of Schedule E (Form 1040), as applicable, for the tax year that includes the last day of any calendar quarter with respect to which a credit is allowed. A credit is available only if the leave was taken after March 31, 2020, and before October 1, 2021, and only after the qualified leave wages were paid, which might, under certain circumstances, not occur until a quarter after September 30, 2021, including qualifying quarterly payments made during 2023. Accordingly, all lines related to qualified sick and family leave wages remain on the employment tax returns for 2023.
A credit is available only if the leave was taken after March 31, 2020, and before October 1, 2021, and only after the qualified leave wages were paid, which might, under certain circumstances, not occur until a quarter after September 30, 2021, including qualifying quarterly payments made during 2023. Accordingly, all lines related to qualified sick and family leave wages remain on the employment tax returns for 2023.
Commercial clean vehicle credit. Businesses that buy a qualified commercial clean vehicle may qualify for a clean vehicle tax credit. See Form 8936 and its instructions for more information.
Bonus depreciation. The bonus depreciation deduction under section 168(k) begins its phaseout in 2023 with a reduction of the applicable limit from 100% to 80%.
Net Investment Income Tax (NIIT). You may be subject to the NIIT. NIIT is a 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) over the threshold amount. Net investment income may include rental income and other income from passive activities. Use Form 8960 to figure this tax. For more information on NIIT, go to IRS.gov/NIIT.
Form 7205, Energy Efficient Commercial Buildings Deduction. This form and its separate instructions are used to claim the section 179D deduction for qualifying energy efficient commercial building expense(s).
Excess business loss limitation. If you report a loss on line 26, 32, 37, or 39 of your Schedule E (Form 1040), you may be subject to a business loss limitation. The disallowed loss resulting from the limitation will not be reflected on line 26, 32, 37, or 39 of your Schedule E. Instead, use Form 461 to determine the amount of your excess business loss, which will be included as income on Schedule 1 (Form 1040), line 8p. Any disallowed loss resulting from this limitation will be treated as a net operating loss that must be carried forward and deducted in a subsequent year.See Form 461 and its instructions for details on the excess business loss limitation.
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
Do you own a second house that you rent out all the time? Do you own a vacation home that you rent out when you or your family isn't using it?
These are two common types of residential rental activities discussed in this publication. In most cases, all rental income must be reported on your tax return, but there are differences in the expenses you are allowed to deduct and in the way the rental activity is reported on your return.
Chapter 1 discusses rental-for-profit activity in which there is no personal use of the property. It examines some common types of rental income and when each is reported, as well as some common types of expenses and which are deductible.
Chapter 2 discusses depreciation as it applies to your rental real estate activity—what property can be depreciated and how much it can be depreciated.
Chapter 3 covers the reporting of your rental income and deductions, including casualties and thefts, limitations on losses, and claiming the correct amount of depreciation.
Chapter 4 discusses special rental situations. These include condominiums, cooperatives, property changed to rental use, renting only part of your property, and a not-for-profit rental activity.
Chapter 5 discusses the rules for rental income and expenses when there is also personal use of the dwelling unit, such as a vacation home.
Finally, chapter 6 explains how to get tax help from the IRS.
Sale or exchange of rental property.
For information on how to figure and report any gain or loss from the sale, exchange, or other disposition of your rental property, see Pub. 544.
Sale of main home used as rental property.
For information on how to figure and report any gain or loss from the sale or other disposition of your main home that you also used as rental property, see Pub. 523.
Tax-free exchange of rental property occasionally used for personal purposes.
If you meet certain qualifying use standards, you may qualify for a tax-free exchange (a like-kind or section 1031 exchange) of one piece of rental property you own for a similar piece of rental property, even if you have used the rental property for personal purposes.
For information on the qualifying use standards, see Revenue Procedure 2008-16, 2008-10 I.R.B. 547, available at IRS.gov/irb/2008-10_IRB#RP-2008-16. For more information on like-kind exchanges, see chapter 1 of Pub. 544.
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Getting answers to your tax questions.
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Publication
Form (and Instructions)
This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Generally, each year, you will report all income and deduct all out-of-pocket expenses in full. The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2.
. If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read chapter 5 . .
In most cases, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. It isn’t limited to amounts you receive as normal rental payments.
When you report rental income on your tax return generally depends on whether you are a cash or an accrual basis taxpayer. Most individual taxpayers use the cash method.
Cash method.
You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.
Accrual method.
If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. You generally deduct your expenses when you incur them, rather than when you pay them.
More information.
See Pub. 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting.
The following are common types of rental income.
Advance rent.
Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.
Example.
On March 18, 2023, you signed a 10-year lease to rent your property. During 2023, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. You must include $19,200 in your rental income in 2023.
Canceling a lease.
If your tenant pays you to cancel a lease, the amount you receive is rent. Include the payment in your rental income in the year you receive it regardless of your method of accounting.
Expenses paid by tenant.
If your tenant pays any of your expenses, those payments are rental income. Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. For more information, see Rental Expenses , later.
Example 1.
Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Under the terms of the lease, your tenant doesn’t have to pay this bill. Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the utility payment made by your tenant as a rental expense.
Example 2.
While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the repair payment made by your tenant as a rental expense.
Property or services.
If you receive property or services as rent, instead of money, include the fair market value (FMV) of the property or services in your rental income.
If the services are provided at an agreed upon or specified price, that price is the FMV unless there is evidence to the contrary.
Example.
Your tenant is a house painter. He offers to paint your rental property instead of paying 2 months rent. You accept his offer.
Include in your rental income the amount the tenant would have paid for 2 months rent. You can deduct that same amount as a rental expense for painting your property.
Security deposits.
Don’t include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant doesn’t live up to the terms of the lease, include the amount you keep in your income in that year.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.
Lease with option to buy.
If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price.
Part interest.
If you own a part interest in rental property, you must report your part of the rental income from the property.
Rental of property also used as your home.
If you rent property that you also use as your home and you rent it less than 15 days during the tax year, don’t include the rent you receive in your income. Also, expenses from this activity are not considered rental expenses. For more information, see Used as a home but rented less than 15 days under Reporting Income and Deductions in chapter 5.
In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.
Personal use of rental property.
If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Also, your rental expense deductions may be limited. See chapter 5.
Part interest.
If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership.
Example.
Roger owns a one-half undivided interest in a rental house. Last year, he paid $968 for necessary repairs on the property. Roger can deduct $484 (50% (0.50) × $968) as a rental expense. He is entitled to reimbursement for the remaining half from the co-owner.
You generally deduct your rental expenses in the year you pay them.
If you use the accrual method, see Pub. 538 for more information.
Listed below are the most common rental expenses.
Depreciation.
Depreciation is a capital expense. It is the mechanism for recovering your cost in an income-producing property and must be taken over the expected life of the property.
You can begin to depreciate rental property when it is ready and available for rent. See Placed in Service under When Does Depreciation Begin and End? in chapter 2.
Insurance premiums paid in advance.
If you pay an insurance premium for more than 1 year in advance, you can’t deduct the total premium in the year you pay it. For each year of coverage, you can deduct only the part of the premium payment that applies to that year.
Interest expense.
You can deduct mortgage interest you pay on your rental property. When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally can’t be deducted as a rental expense.
Expenses paid to obtain a mortgage.
Certain expenses you pay to obtain a mortgage on your rental property can’t be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property.
Form 1098, Mortgage Interest Statement.
If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Attach a statement to your return showing the name and address of the other person. On the dotted line next to line 13, enter “See attached.”
Legal and other professional fees.
You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. For example, on your 2023 Schedule E, you can deduct fees paid in 2023 to prepare Part I of your 2022 Schedule E. You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities.
Local benefit taxes.
In most cases, you can’t deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. These charges are nondepreciable capital expenditures and must be added to the basis of your property. However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits.
Local transportation expenses.
You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. See Pub. 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business.
Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. For 2023, the standard mileage rate is 65.5 cents a mile. For more information, see chapter 4 of Pub. 463.
. To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Pub. 463. In addition, you must complete Form 4562, Part V, and attach it to your tax return. .
Pre-rental expenses.
You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.
Rental of equipment.
You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts are actually purchase contracts. If so, you can’t deduct these payments. You can recover the cost of purchased equipment through depreciation.
Rental of property.
You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease.
Travel expenses.
You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and nonrental activities. You can’t deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. The cost of improvements is recovered by taking depreciation. For information on travel expenses, see chapter 1 of Pub. 463.
. To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Pub. 463. .
Uncollected rent.
If you are a cash basis taxpayer, don’t deduct uncollected rent. Because you haven’t included it in your income, it’s not deductible.
If you use an accrual method, report income when you earn it. If you are unable to collect the rent, you may be able to deduct it as a business bad debt. See section 166 and its regulations for more information about business bad debts.
Vacant rental property.
If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you can’t deduct any loss of rental income for the period the property is vacant.
Vacant while listed for sale.
If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property isn’t held out and available for rent while listed for sale, the expenses aren’t deductible rental expenses.
The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. These charges are also called loan origination fees, maximum loan charges, or premium charges. Any of these charges (points) that are solely for the use of money are interest. Because points are prepaid interest, you generally can’t deduct the full amount in the year paid, but must deduct the interest over the term of the loan.
The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. In this case, points paid (or treated as paid (such as seller paid points)), by a borrower to a lender increase OID which is the excess of:
For more detailed information to determine OID on a mortgage loan, including how to determine the stated redemption price at maturity and issue price of a mortgage loan, see the regulations under section 1273.
The first step to determine the amount of your deduction for the points is to determine whether your total OID on the mortgage loan, including the OID resulting from the points is de minimis. If the OID isn’t de minimis, you must use the constant-yield method to figure how much you can deduct.
De minimis OID.
The OID is de minimis if it is less than one-fourth of 1% (0.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity (term of the loan).
If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year.
You make this choice by deducting the OID (including the points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued.
Example.
Carol took out a $100,000 mortgage loan on January 1, 2023, to buy a house she will use as a rental during 2023. The loan is to be repaid over 30 years. The loan requires interest payable each year at a fixed rate. During 2023, Carol paid $10,000 of mortgage interest (stated interest) to the lender. When the loan was made, she paid $1,500 in points to the lender. The amount of the OID on the loan is $1,500, which is the difference between the stated redemption price at maturity of $100,000 less the issue price of $98,500 (the amount borrowed of $100,000 minus the points paid of $1,500). Carol determines that the points (OID) she paid are de minimis based on the following computation.
| Stated redemption price at maturity (principal amount of the loan in this case) | $100,000 |
| Multiplied by: The term of the loan in complete years | × 30 |
| Multiplied by | × 0.0025 |
| De minimis amount | $ 7,500 |
The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Under the straight line method, she can deduct $50 each year for 30 years.
Constant-yield method.
If the OID (including the points) isn’t de minimis, you must use the constant-yield method to figure how much you can deduct each year.
You figure your deduction for the first year in the following manner.
Yield to maturity (YTM).
This rate is generally shown in the literature you receive from your lender. If you don’t have this information, consult your lender or tax advisor. In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the issue price of the loan.
Qualified stated interest (QSI).
In general, this is the stated interest that is unconditionally payable in cash or property (other than another debt instrument of the borrower) at least annually over the term of the loan at a fixed rate.
Example—Year 1.
The facts are the same as in the previous example. The YTM on Carol's loan is 10.2467%, compounded annually.
She figured the amount of points (OID) she could deduct in 2023 as follows.
| Amount borrowed | $100,000 |
| Minus: Points (OID) | – 1,500 |
| Issue price of the loan | $ 98,500 |
| Multiplied by: YTM | × 0.102467 |
| Total | 10,093 |
| Minus: QSI | – 10,000 |
| Points (OID) deductible in 2023 | $ 93 |
To figure your deduction in any subsequent year, you start with the adjusted issue price. To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Then, follow steps (2) and (3), earlier.
Example—Year 2.
Carol figured the deduction for 2024 as follows.
| Issue price | $98,500 |
| Plus: Points (OID) deducted in 2023 | + 93 |
| Adjusted issue price | $98,593 |
| Multiplied by: YTM | × 0.102467 |
| Total | 10,103 |
| Minus: QSI | – 10,000 |
| Points (OID) deductible in 2024 | $ 103 |
Loan or mortgage ends.
If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. However, if the refinancing is with the same lender, the remaining points (OID) generally aren’t deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan.
Points when loan refinance is more than the previous outstanding balance.
When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally can’t be deducted as a rental expense.
Example.
You refinanced a loan with a balance of $100,000. The amount of the new loan was $120,000. You used the additional $20,000 to purchase a car. The points allocable to the $20,000 would be treated as nondeductible personal interest.
Generally, an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.
Improvements.
You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Table 1-1 shows examples of many improvements.
Betterments.
Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
Restoration.
Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
Adaptation.
Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property.
De minimis safe harbor for tangible property.
If you elect this de minimis safe harbor for your rental activity for the tax year, you aren’t required to capitalize the de minimis costs of acquiring or producing certain real and tangible personal property and may deduct these amounts as rental expenses on line 19 of Schedule E. For more information on electing and using the de minimis safe harbor for tangible property, see Tangible Property Regulations-Frequently Asked Questions.
Safe harbor for routine maintenance.
If you determine that your cost was for an improvement to a building or equipment, you may still be able to deduct your cost under the routine maintenance safe harbor. See Tangible Property Regulations-Frequently Asked Questions for more information.
. Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements when you sell or depreciate your property. .
The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property.