I purchased a rental property last year. What closing costs can I deduct?

The only deductible closing costs are those for interest, and deductible real estate taxes. Other settlement fees and closing costs for buying the property become additions to your basis in the property. These basis adjustments include:

Abstract fees,

Charges for installing utility services,

Legal fees,

Recording fees,

Surveys,

Transfer taxes,

Title insurance, and

Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Fees related to obtaining a loan are capital expenses and should be amortized over the life of the loan.

For additional information, refer to Publication 527, Residential Rental Property, Publication 17, Your Individual Income Tax Guide, and Publication 535, Business Expenses.

References:

• Publication 527, Residential Rental Property
• Publication 17, Your Individual Income Tax Guide
• Publication 535, Business Expenses

I own a duplex. I live on one side and rent out the other. Are my mortgage interest and property taxes fully deductible on Schedule E?

No. Assuming that the loan is secured by the duplex, only the mortgage interest and property taxes for the portion you are renting are deductible on Form 1040, Schedule E (PDF), Supplemental Income and Loss. If you receive one bill, you should prorate the rental portion based on square footage. Your portion can be deducted on Form 1040, Schedule A (PDF), Itemized Deductions, if you itemize and meet the requirements for Deductible Home Mortgage Interest. For more information, refer to Publication 527, Residential Rental Property (including Vacation Homes), Instructions for Form 1040, Schedule E, Supplemental Income and Loss, and Publication 936, Home Mortgage Interest.

References:

• Publication 527, Residential Rental Property (including Vacation Homes)
• Instructions for Form 1040, Schedule E, Supplemental Income and Loss
• Publication 936, Home Mortgage Interest

Can you deduct Private Mortgage Insurance (PMI) premiums on rental property? If so, which line item on Schedule E?

Yes. You can deduct Private Mortgage Insurance premium on line 9 of Form 1040, Schedule E (PDF), Supplemental Income and Loss. Write "PMI" on the dotted line.

References:

• Publication 527, Residential Rental Property
• Form 1040, Schedule E (PDF), Supplemental Income and Loss
• Instructions for Form 1040, Schedule E, Supplemental Income and Loss

Where on Schedule E do you put costs paid (points, fees, etc.) to refinance a rental property?

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. You may amortize them over the life of the mortgage on line 18 of Form 1040, Schedule E (PDF), Supplemental Income and Loss.

References:

• Form 1040, Schedule E (PDF), Supplemental Income and Loss
• Publication 527, Residential Rental Property

I have losses from a passive rental real estate activity in which I actively participate. Can I offset the losses against my nonpassive income?

Generally, if your rental of real estate is a passive activity, you may offset a loss of up to $25,000 against your nonpassive income subject to certain income limitations, if you actively participate in the activity. However, married persons filing separate returns who lived together at any time during the year may not claim this offset. Married persons filing separate returns who lived apart at all times during the year are each allowed a $12,500 maximum offset for passive real estate activities. For additional information on limits on rental losses, refer to Chapter 10 of Publication 17, Your Federal Income Tax, and Tax Topic 425, Passive Activities - Losses and Credits, as well as Instructions for Form 1040, Schedule E, Supplemental Income and Loss.

References:

• Publication 17, Your Federal Income Tax
• Tax Topic 425, Passive Activities - Losses and Credits
• Instructions for Form 1040, Schedule E, Supplemental Income and Loss