What is the definition of a rental property?

Residential rental property refers to dwellings that are acquired by an investor and inhabited by tenants under a lease or other type of rental agreement. One of the IRS definitions of rental property is a property that serves permanently as a rental.

What is the definition of a rental property?

Residential rental property refers to dwellings that are acquired by an investor and inhabited by tenants under a lease or other type of rental agreement. One of the IRS definitions of rental property is a property that serves permanently as a rental. A permanent rental is never used as a dwelling for the owner or for the dependents he or she claims on his or her federal income tax return. A permanent rental is a house, duplex, or apartment complex that serves on a full-time rental basis and is not used by a nonprofit organization.

In IRS parlance, a property is a residential rental if it derives more than 80 percent of its income from the dwelling units. For most properties, the 80 percent rule is an unnecessary test. If you rent a single-family house or flat to a family, for example, 100 percent of the income will come from the dwelling. Residential rental property can include a single house, a flat, a condominium, a mobile home, a holiday home or similar property.

These properties are often referred to as dwellings. Taxpayers who rent property may use more than one dwelling as a residence during the year. According to IRS definitions of rental property, a non-profit rental is a house, duplex or flat that is rented without the owner making a profit. In this case, the property will be classified as residential if 80 percent of the monthly rental income comes from its residential tenants.

Residential rental property is more or less what it sounds like: a residential house that is bought to rent out to tenants. You do not have to generate rental income from the property on a consistent basis to receive this classification - the proof is in how often you use it. Investment in residential rental property is a passive activity, which means that it is subject to the passive activity loss rules. A partial rental property is one where part of the property is rented out, and the other part is inhabited by the owner.

The Tax Cuts and Jobs Act changed the recovery period of the alternative depreciation system for residential rental property from 40 years to 30 years. You can continue to claim depreciation on residential rental property even if it is temporarily inactive and not producing income. An owner can deduct rental-related expenses on his or her income taxes, but must also report all income that is associated with the permanent rental property. If the holiday home is occupied for less than 15 days a year, or not at all, the IRS considers it a residential rental property.

In contrast, depreciation of non-residential rental property takes place over 39 years, so full depreciation is obtained much more quickly as a residential real estate investor. If the taxpayer includes expenses paid by a tenant, the fair market value of the property or services provided by a tenant in his rental income, he will normally be able to deduct that same amount as a rental expense. The second major tax advantage of owning a rental property is that you can recover the cost of the property as a capital expense by depreciating the property; that is, by deducting part of the cost each year on your tax return. The significance here is that owning a residential rental property gives the investor additional tax advantages that other types of investments, including a primary residence, cannot confer.

Courtney Thomson
Courtney Thomson

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