This part discusses expenses of renting property that you
ordinarily can deduct from your gross rental income. It includes
information on the expenses you can deduct if you rent a condominium
or cooperative apartment, if you rent part of your property, or if you
change your property to rental use. Depreciation, which you can also
deduct from your gross rental income, is discussed later.
When to deduct.
You generally deduct your rental expenses in the year you pay them.
Vacant rental property.
If you hold property for rental purposes, you may be able to deduct
your ordinary and necessary expenses for managing, conserving, or
maintaining the property while the property is vacant. However, you
cannot deduct any loss of rental income for the period the property is
You can deduct your ordinary and necessary expenses for managing,
conserving, or maintaining rental property from the time you make it
available for rent.
You can begin to depreciate rental property when it is available
and ready for rent. See, Placed-in-Service Date under
Expenses for rental property sold.
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.
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 Personal Use
of Vacation Home or Dwelling Unit, later.
If you own a part interest in rental property, you can deduct your
part of the expenses that you paid.
Repairs and Improvements
You can deduct the cost of repairs to your rental property. You
cannot deduct the cost of improvements. You recover the cost of
improvements by taking depreciation (explained later).
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.
A repair keeps your property in good operating condition. It does
not materially add to the value of your property or substantially
prolong its life. Repainting your property inside or out, fixing
gutters or floors, fixing leaks, plastering, and replacing broken
windows are examples of repairs.
If you make repairs as part of an extensive remodeling or
restoration of your property, the whole job is an improvement.
An improvement adds to the value of property, prolongs its useful
life, or adapts it to new uses. Table 1 shows examples of
If you make an improvement to property, the cost of the improvement
must be capitalized. The capitalized cost can generally be depreciated
as if the improvement were separate property.
Other expenses you can deduct from your gross rental income include
advertising, cleaning and maintenance services, utilities, fire and
liability insurance, taxes, interest, commissions for the collection
of rent, ordinary and necessary travel and transportation, and other
expenses discussed next.
Rental payments for 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.
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 cannot deduct these payments. You can
recover the cost of purchased equipment through depreciation.
Insurance premiums paid in advance.
If you pay an insurance premium for more than one year in advance,
each year you can deduct the part of the premium payment that will
apply to that year. You cannot deduct the total premium in the year
you pay it.
Local benefit taxes.
Generally, you cannot 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. You must add them to the basis of
your property. You can deduct local benefit taxes if they are for
maintaining, repairing, or paying interest charges for the benefits.
You can deduct mortgage interest you pay on your rental property.
Chapter 5 of Publication 535
explains mortgage interest in detail.
Expenses paid to obtain a mortgage.
Certain expenses you pay to obtain a mortgage on your rental
property cannot be deducted as interest. These expenses, which include
mortgage commissions, abstract fees, and recording fees, are capital
expenses. However, you can amortize them over the life of the
If you paid $600 or more of mortgage interest on your rental
property to any one person, you should receive a Form 1098,
Mortgage Interest Statement, or similar statement showing
the interest you paid for the year. If you and at least on 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 line 13 of
Schedule E (Form 1040). Attach a statement to your return showing the
name and address of the other person. In the left margin of Schedule
E, next to line 13, write "See attached."
The term "points" is often used to describe some of the
charges paid by a borrower when the borrower takes out a loan or a
mortgage. These charges are also called loan origination fees,
maximum loan charges, or premium charges. If any of these charges
(points) are solely for the use of money, they are interest.
Points paid when you take out a loan or mortgage result in original
issue discount (OID). In general, the points (OID) are deductible as
interest unless they must be capitalized. How you figure the amount of
points (OID) you can deduct each year depends on whether or not your
total OID, including the OID resulting from the points, is
insignificant or de minimis. If the OID is not de minimis, you must
use the constant-yield method to figure how much you can deduct.
De minimis OID.
In general, the OID is de minimis if it is less than one-fourth of
1% (.0025) of the stated redemption price at maturity (generally, the
principal amount of the loan) multiplied by the number of full years
from the date of original issue to maturity (the term of the loan).
If the OID is de minimis, you can choose one of the following ways
to figure the amount you can deduct each year.
- On a constant-yield basis over the term of the loan.
- On a straight-line basis over the term of the loan.
- In proportion to stated interest payments.
- In full at maturity of the loan.
You make this choice by deducting the OID in a manner
consistent with the method chosen on your timely filed tax return for
the tax year in which the loan or mortgage is issued.
Example of de minimis amount.
On January 1, 2000, you took out a loan for $100,000. The loan
matures on January 1, 2010 (a 10-year term) and the stated principal
amount of the loan ($100,000) is payable on that date. An interest
payment of $10,000 is payable to the bank on January 2 of each year,
beginning on January 2, 2001. When the loan was made, you paid $1,500
in points to the bank. The points reduced the issue price of the loan
from $100,000 to $98,500, resulting in $1,500 of OID. You determine
that the points (OID) you paid are de minimis based on the following
|Redemption price at maturity (principal amount
of the loan)
|Multiplied by: The term of the loan in complete
|| x .0025|
|De minimis amount
The points (OID) you paid ($1,500) are less than the de
minimis amount; therefore, you have de minimis OID and you can choose
one of the four ways discussed earlier to figure the amount you can
deduct each year. Under the straight line method, you can deduct $150
each year for 10 years.
If the OID is not 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
- Determine the issue price of the loan. For example, if you
paid points on a loan, subtract the points you paid from the principal
amount of the loan to get the issue price.
- Multiply the issue price (the result in (1)) by the yield to
- Subtract any qualified stated interest payments from the
result in (2). This is the amount of OID you can deduct in the first
To figure your deduction in any subsequent years, you start with
the adjusted issue price. To get the adjusted issue price,
add to the issue price any OID previously deducted. Then follow steps
(2) and (3) above.
The yield to maturity (YTM) is generally shown in the
literature you receive from your lender. If you do not 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
principal amount of the loan.
Qualified stated interest (QSI) generally is stated
interest that is unconditionally payable in cash or property (other
than debt instruments of the issuer) at least annually at a single
Example of constant yield.
The facts are the same as in the previous example. The yield to
maturity on your loan is 10.2467%, compounded annually.
You figure the amount of points (OID) you can deduct in 2000 as
|Principal amount of the loan
|Issue price of the loan
|Multiplied by: YTM
|| x .102467|
|Points (OID) deductible in 2000
You figure the deduction for 2001 as follows.
|Plus: Points (OID) deducted in 2000
|Adjusted issue price
|Multiplied by: YTM
|| x .102467|
|Points (OID) deductible in 2001
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 are not deductible
in the year in which the refinancing occurs, but may be deductible
over the term of the new mortgage or loan.
You can deduct the ordinary and necessary expenses of traveling
away from home if the primary purpose of the trip was to collect
rental income or to manage, conserve, or maintain your rental
property. You must properly allocate your expenses between rental and
nonrental activities. For information on travel expenses, see chapter
1 of Publication 463.
To deduct travel expenses, you must keep records that follow the
rules in chapter 5 of Publication 463.
Local transportation expenses.
You can 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.
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 2000 the
standard mileage rate for all business miles is 32.5 cents a mile. For
more information, see chapter 4 of Publication 463.
To deduct car expenses under either method, you must keep records
that follow the rules in chapter 5 of Publication 463.
you must complete Part V of Form 4562, and attach it to your tax
Tax return preparation.
You can deduct, as a rental expense, the part of tax return
preparation fees you paid to prepare Part I of Schedule E (Form 1040).
For example, on your 2000 Schedule E you can deduct fees paid in 2000
to prepare Part I of your 1999 Schedule E. You can also deduct, as a
rental expense, any expense you paid to resolve a tax underpayment
related to your rental activities.
If you rent out a condominium or a cooperative apartment, special
rules apply. Condominiums are treated differently from cooperatives.
If you own a condominium, you own a dwelling unit in a multi-unit
building. You also own a share of the common elements of the
structure, such as land, lobbies, elevators, and service areas. You
and the other condominium owners may pay dues or assessments to a
special corporation that is organized to take care of the common
If you rent your condominium to others, you can deduct
depreciation, repairs, upkeep, dues, interest and taxes, and
assessments for the care of the common parts of the structure. You
cannot deduct special assessments you pay to a condominium management
corporation for improvements. But you may be able to recover your
share of the cost of any improvement by taking depreciation.
If you have a cooperative apartment that you rent to others, you
can usually deduct, as a rental expense, all the maintenance fees you
pay to the cooperative housing corporation. However, you cannot deduct
a payment earmarked for a capital asset or improvement, or otherwise
charged to the corporation's capital account. For example, you cannot
deduct a payment used to pave a community parking lot, install a new
roof, or pay the principal of the corporation's mortgage. You must add
the payment to the basis of your stock in the corporation.
Treat as a capital cost the amount you were assessed for capital
items. This cannot be more than the amount by which your payments to
the corporation exceeded your share of the corporation's mortgage
interest and real estate taxes.
Your share of interest and taxes is the amount the corporation
elected to allocate to you, if it reasonably reflects those expenses
for your apartment. Otherwise, figure your share in the following way.
- Divide the number of your shares of stock by the total
number of shares outstanding, including any shares held by the
- Multiply the corporation's deductible interest by the number
you figured in (1). This is your share of the interest.
- Multiply the corporation's deductible taxes by the number
you figured in (1). This is your share of the taxes.
In addition to the maintenance fees paid to the cooperative housing
corporation, you can deduct your direct payments for repairs, upkeep,
and other rental expenses, including interest paid on a loan used to
buy your stock in the corporation. The depreciation deduction allowed
for cooperative apartments is discussed later.
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