I have a tax question related to reporting rental income. The rental income I receive for a house I own is only enough to cover the mortgage. Do I have to pay tax on rental income received?

Reporting rental income from a rental property is necessary. If you’re renting the home at its full rental value, report the full rental income on Schedule E. You can offset the tax on rental income by claiming all of your ordinary and necessary expenses.

Expenses of a rental property include:

  • Mortgage interest
  • Depreciation
  • Repairs and maintenance
  • Advertising

You can't deduct the principal portion of your mortgage payments. Claim depreciation instead.

If you’re not renting the home at its full rental value, report the income as “Income From an Activity Not Done for Profit” in the Other Income section of your return. The expenses will be allowed up to the amount of the income you received for the year.

Here’s how:

  1. Take the mortgage interest and the real estate taxes up to the amount of income. (Take these expenses in your itemized deductions as usual.)
  2. Take all other expenses except depreciation, up to the remaining income. (Take these expenses on Schedule A under Miscellaneous Expenses. Any amount that’s more than 2% of your adjusted gross income (AGI) will be allowed as an itemized deduction.)
  3. Deduct depreciation up to the remaining income after you subtract these:
    • Mortgage interest
    • Real estate taxes
    • Other ordinary and necessary expenses

You would also expense the allowed depreciation. Do this as a miscellaneous itemized deduction subject to the 2% of AGI limitation.

If you’d like to learn more, see Publication 527 at www.irs.gov.

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