IRS Publication 527: What it is and how it works

Key takeaways

• Publication 527, “Residential Rental Property,” explains how the IRS treats rental income and expenses for residential properties rented for income.
• Rental income includes normal and advance rent, payments to cancel a lease, and tenant-paid expenses.
• Special rules apply when a dwelling is rented for fewer than 15 days in a year.
• Publication 527 explains depreciation rules, allowable deductions, and the passive-activity loss exception for owners who actively participate.

Overview

IRS Publication 527 provides tax guidance for individuals who rent out residential property. It describes what counts as rental income, how to treat advance payments and lease cancellations, which expenses can be deducted, and how to handle depreciation and partial rentals.

What counts as rental income

The IRS considers the following as rental income:
* Regular rent payments.
Advance rent — amounts paid before the period they cover.
Payments made to cancel a lease.
* Tenant-paid expenses (when a tenant pays an owner’s expenses).

Example: If a landlord signs a multi-year lease on February 15 and collects rent for both the first and the last year at signing, both amounts must be reported as rental income in the year received.

Short-term rental exception

If you rent a dwelling for fewer than 15 days during the year, you do not report the rental income and you cannot deduct rental expenses for that period.

Deductions and depreciation

Publication 527 outlines deductible expenses and how to claim depreciation on rental property. Common deductible expenses include:
* Mortgage interest and mortgage insurance premiums.
Real estate taxes.
Depreciation of the property.
* Utilities and ordinary operating expenses (for example, electricity, painting, repairs).

Depreciation allows owners to recover the cost of residential rental property over a statutory recovery period; Publication 527 explains how to compute and claim it.

Passive activity rules and active participation

Rental activity is typically considered passive, which limits the ability to deduct losses against non-rental income. However, owners who actively participate in managing the rental (for example, collecting rents, arranging repairs, hiring contractors) may be able to deduct up to $25,000 of rental losses against other income, subject to eligibility rules and income phaseouts.

Practical guidance

• Review Publication 527 before renting a home to understand how rental income and expenses will be treated.
• Track all rent receipts, advance payments, lease-cancellation payments, and tenant-paid expenses.
• Keep records of deductible expenses and depreciation calculations to support amounts claimed on your tax return.

For complete instructions and specific examples, consult the full IRS Publication 527.