Can Real Estate Taxes on a Rental Be Taken on Schedule A?
- Schedule A allows you to list certain items that the IRS allows you to exclude from your taxable items. Typically, these things relate to ways that you spend your personal money, which the government chooses to either support or subsidize. For instance, to encourage you to give charitably, the government allows you to deduct donations that you make to nonprofit organizations. In addition, it incentivizes you to buy a personal residence by letting you write off your mortgage interest and property taxes.
- The IRS taxes profit but not gross income. What you earn at work is really profit, since you are able to take that money and not be required to pour more money into earning it. What you take from your rental property, though, is gross income. When you collect a rent check, you have to spend a portion of it on maintaining and owning the property. At a minimum, you have to pay for property taxes and the cost of finding new tenants. As such, the IRS does not tax your rent. It taxes what you have left from the rent after paying the expenses of owning the property -- your profit.
- Rental property income and expenses get reported on the Schedule E form. This requires you to tabulate all of the income that you receive from your rental properties then allows you to subtract out just about every expense that you incur in its ownership. In fact, your property taxes can be reported, and subtracted, on Line 16. At the bottom of the form, you simply subtract all of the expenses from all of the income and come up with your profit, or loss, from your rental real estate. That number gets carried over to the front of your 1040 in Line 17.
- Itemized deductions on Schedule A, such as the deduction for the real estate taxes on your personal residence, are subject to a number of limitations. If your income is too high, they get limited, and if you have the wrong combination of income and deductions, you can end up subject to the alternative minimum tax, which eliminates just about every deduction. With the Schedule E, all of your expenses come off of the top, without falling subject to any of the limitations that affect Schedule A. Furthermore, even if you have a loss on your Schedule E, there are certain instances where you can use that loss against future income or even other types of current income.