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11.2 Sale or Trade of Business, Depreciation, Rentals: Rental Expenses v Passive Activity Losses (PALs)
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:
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:
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:
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:
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:
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