Completing tax returns for rental property can be confusing if you don't know what you are doing

Here are some of the questions we’ve recently been asked about rental property taxation.

When do I have to pay taxes on my rental income?

You need to report your rental property income in the same year that you earn the income.

Are expenses deductible even when the property is vacant?

As long as the property is listed as being available for rent, your expenses are deductible.

Can I immediately deduct rental rehab costs?

It depends on whether the property is actively being advertised or not. While you’re still in the process of rehabbing the property, it is not yet considered a rental. You have to wait to deduct rehab expenses until the property is ready and advertised to rent.

Are ALL maintenance expenses fair game to deduct?

As a general rule, yes—but they must be “ordinary and necessary.” You can deduct yard maintenance costs like lawn mowing and basic landscaping, but you can’t spend days pruning the bushes into elaborate flamingo-shaped topiaries and write it off as a landscaping expense. Any costs deemed “extravagant” can bite you later.

Does flipping income count as capital gain?

No, unfortunately flipping income doesn’t count as capital gain income. Since your intent was to rehab and sell the property, you cannot claim to hold the property for investment. Some investors try to write off their flips as long-term capital gain income, but this will eventually get you into trouble.

Do I lose tax benefits if I can’t use my passive losses due to high income?

No, you don’t lose the benefits. You may not be eligible to use them right now, but they’re not gone. They are just suspended. In the future, you’ll be able to use them to offset future passive income or offset the gain when you sell an investment property.

Should I write off depreciation?

Yes—always write off depreciation! It’s hard to see the immediate benefits, so some people neglect this opportunity, but it’s completely worth the effort. Even though it adds to your suspended passive losses, you will get the benefit of using the money you saved for the years you deducted it.

Do I need a license to count as a real estate professional for tax purposes?

No, you don’t need to be a licensed real estate professional. However, you cannot work at a full-time job that is unrelated to real estate—you need to be working within the field in some shape or form if you are to qualify as a professional for tax purposes. For many, this does mean obtaining a real estate license and working as a real estate agent. For others, it means working as a property manager, contractor, or something else related to real estate. You also need to show that you’ve participated in rental real estate activity for a certain number of hours. Make sure to have proof of all the hours you spent working in real estate and working on your rentals. Also, every year you start fresh. Last year’s qualification as a real estate professional won’t work for you this year.

Do you have any more questions you’d like us to respond to? Let us know in the comments.