Ask the Tax Editor, January 23: Questions on Residential Rental Property

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week she's looking at five questions on reporting income and loss from residential rental property. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Can I deduct interest paid on a HELOC?

Question: I own a rental home that I lease to a tenant. Every year, I attach Schedule E to my Form 1040 to report the income or loss from the property. I have a mortgage on the property and deduct the interest I pay on Schedule E. Last year, I took out a home equity line of credit (HELOC) on the house. In addition to deducting the interest I pay on the primary mortgage, can I also deduct the interest that I pay on the HELOC?

Joy Taylor: It appears that you can deduct interest paid on the HELOC on Schedule E if you used the HELOC proceeds for use in your rental activity. For example, if you used the HELOC proceeds to renovate or improve the home, you can deduct the interest on Schedule E. If you used the HELOC proceeds for other purposes not related to your rental activity, then the interest is not deductible. If you used the proceeds for mixed use (a portion for rental property improvements and a portion for personal use), then you'll need to trace the interest to how the proceeds were used. Here is language from the IRS's Schedule E instructions.

"In most cases, to determine the interest expense allocable to your rental activities, you must have records to show how the proceeds of each debt were used. Specific tracing rules apply for allocating debt proceeds and repayment. In general, you allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disbursements to specific uses."

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2. Do landlords qualify for the QBI deduction?

Question: I own rental property and generate a profit from the activity. Can I claim a 20% qualified business income (QBI) deduction for my rental income that I report on Schedule E of my Form 1040?

Joy Taylor: It depends. Self-employed individuals and owners of LLCs, partnerships, S corporations and other pass-through entities can deduct 20% of their QBI, subject to limitations for individuals with incomes in 2025 of more than $394,600 for joint filers and $197,300 for single filers and head-of-household filers. (For 2026, these figures are $403,500 for joint filers and $201,750 for others.)

Rental income reported on Schedule E of the Form 1040 may be eligible for the deduction in certain cases. There are two ways to qualify for the 20% QBI write-off for rental income. The first is whether the rental activity rises to the level of a trade or business. For this purpose, the IRS’s regulations refer to the standard under tax code Section 162, the statute that generally governs the deductibility of trade or business expenses.

There is no statutory or regulatory definition of a Section 162 trade or business. Instead, this is based on each taxpayer’s specific facts and circumstances. Some relevant factors are the type of property (commercial or residential), lease terms, extent of day-to-day involvement by the lessor or his or her agents, the significance and type of ancillary services provided under the lease, and the number of rentals.

A second way to qualify rental income as QBI is to meet an IRS safe harbor. At least 250 hours in a year must be devoted to the rental activity by the taxpayer, employees or independent contractors. Time spent on repairs, collecting rent, negotiating leases, tenant services, property management, advertising and supervising workers counts. Hours put in for driving to and from the property, arranging financing and constructing long-term capital improvements on the property aren’t included. If you own multiple properties, you can treat each property separately or aggregate similar rental activities into commercial or residential categories.

Taxpayers who use the safe harbor must meet strict recordkeeping requirements and attach an annual statement to their tax returns. Contemporaneous records must detail hours, dates and descriptions of the services and who performed them. If the services are done by contractors or employees, the taxpayer must keep logs of the work done by them, as well as proof of payment.

Note that the safe harbor doesn’t apply to rental income from property leased under a triple net lease or if the owner’s personal use of residential property exceeds the greater of 14 days or 10% of the days rented.

Treating rental income as QBI doesn’t change how you report that income on your Form 1040. Real estate rental income is usually reported on Schedule E of the 1040. Also, the rental income generally isn’t subject to self-employment tax.

Read more questions on QBI answered by Joy.

3. Can I deduct travel expenses on Schedule E?

Question: I owned a rental home for 25 years that I sold last year. Over the last 25 years, I made two visits per year to the property to do maintenance on it. For example, I upgraded the landscape, trimmed the grass, and did other small things. Can the cost of these trips be added to my home's tax basis in calculating my gain on the sale? Or can I otherwise now deduct those travel costs?

Joy Taylor: IRS Publication 527, Residential Rental Property, says this about travel expenses to and from rental properties that you own:

"Travel expenses. You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and non-rental activities. You can’t deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. The cost of improvements is recovered by taking depreciation."

Since your trips to the rental property were for maintenance, and not to substantially improve the property, you should have deducted mileage and/or other travel expenses on your tax returns for the years of the visits. The amounts cannot now be added to the basis of your property.

4. What are the tax consequence when I sell?

Question: I plan to sell a rental home that I have owned for many years. I'm sure I will have a gain from the property. How will that gain be taxed on my federal income tax return?

Joy Taylor: If you hold rental property, the gain or loss when you sell is generally characterized as a capital gain or loss. If the property was held for more than one year, it's a long-term capital gain or loss, and if held for one year or less, it's a short-term capital gain or loss.

The gain or loss is the difference between the amount realized on the sale and your tax basis in the property.

The capital gain will generally be taxed at 0%, 15%, or 20%, plus the 3.8% net investment income tax for people with higher incomes. However, a special rule applies to gain on the sale of rental property for which you took depreciation deductions. When depreciable real property held for more than one year is sold at a gain, the federal tax law requires that previously deducted depreciation be recaptured into income and taxed at a top rate of 25%. This is known as unrecaptured Section 1250 gain, the number of its federal tax code section.

5. How is rental income taxed?

Question: I just bought a home that I am going to rent out to tenants. How is the rental income I receive taxed? Is it ordinary income or capital gain?

Joy Taylor: Rental income from real estate that you rent out is taxed at ordinary income tax rates, which vary depending on your taxable income. If you eventually sell the rental property at a gain, then that gain is generally treated as capital gain.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

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