Non-deductible Rental Property Expenses
As a Landlord, there are many expenses that you may incur related to the business activity in which you are performing. Most expenses, which are ordinary and necessary, are usually deductible as an expense; however there may be certain costs that are not allowed. Personal use of any kind is not an allowable deduction in this part of your tax return; however they may be deductible on your Schedule A but limited to your personal Adjusted Gross Income.
Another situation that may arise is the use of the rental property by a family member or spouse as well as use of the property where no income is received. In order for a deduction to be acceptable there must be a valid agreement such as rent payment that is the same as other tenants. Any periods of use that are used by family members and rents are not received, then this time must be used to reduce to period of allowed deductible use time. The same as with personal use, you must allocate this time as non deductible.
There are other expenses that cannot be deductible and must be capitalized based upon the nature of the cost. Improvements made to the property such as a handicap ramp, energy saving doors and windows, must be added to the basis of the property since these items increase the property value. The costs are recovered by depreciation of the property. These costs must be capitalized in accordance with IRS UNICAP regulations. Normal wear and tear repairs are deductible as expenses. Items such as appliances (refrigerators, ovens, ceiling fans), new carpeting, or any value added expense also should be capitalized. Painting, carpet cleaning, landscaping, and pest control are examples of normal repair and maintenance costs which are deductible.
Tenant screening costs such as credit reports, background checks, and reference information are deductible as expenses however, if a security deposit is received and these costs are deducted from the deposit, then the costs are not deductible. Only the portion of the security deposit returned to the tenant is an expense. It is important to note that any refunded costs such as application fees and holding fees before move in which are not refunded to the tenant are deductible by the Landlord as an expense. It is very important to ensure that this is documented prior to the signing of a lease agreement.
Barter services in which a portion of the rent is exchanged for services such as landscaping, must have documented receipts to show the value of the service, period performed, and the reduction of rent applied. Barter services are not deductible expenses but must be documented to reflect the transaction.
S Corporation and partnerships must not deduct any personal use of the rental property. This must be offset be the income and expenses incurred on the property during the period reported.
If you are a cash basis landlord, then you cannot deduct the loss of rent on a tenant since it was never received as Income.