Section 280A & Rental Property Tax Laws
- Rental income can be generally be offset by the expenses that a landlord incurs in maintaining the property and advertising its availability for use. These expenses include depreciation on the underlying property and repairs made to keep the property in working order. Both the revenue and expenses related to the rental property are considered "passive." This classification of income is important because any passive losses can generally only be used to offset passive income, not ordinary income. If in a given year you have a net passive loss, instead of immediately deducting that amount against other income, you can only "carry forward" the amount to be used against future passive income.
- Section 280A prohibits an individual or S corporation from claiming any deductions on a rental property if the individual or shareholder of the S corporation treated the home as a residence at any point during the taxable year. A house is treated as a residence if the home is the principle residence of the individual for 14 days or for 10 percent of the number of days during the tax year the unit is rented. The home is considered a residence if the owner or a member of the owner's family used it for personal purposes, the house is used by another in exchange for the owner using that person's home to reside or the owner allows someone to stay at the home for a fee that is less than fair and reasonable for the area.
- There are several specific exceptions to the prohibition against deductions outlined in Section 280A. Specifically, if only portions of the residence are used for personal uses, while the rest is used only for business or rental purposes, deductions related to those sections of the residence can't be claimed. For rental properties, an example of when this exception could be important is if the owner of a duplex and rents out one of the apartments while living in the other. The only amounts that can be deducted are the expenses directly related to the rented property. So if a repair was made that affected the entire property, for example, only a percentage of that amount would be deductible. That percentage would be defined based on how much of the entire property was used for the rental purpose in comparison to the entirety of the property.
- For complex returns, consult with a tax professional, such as a certified public accountant or licensed attorney. Keep your tax records for at least seven years in case of future audits.
