Income – Schedules K-1 and Rental
12-6
What about property insurance?
The property insurance that taxpayers pay on their residence is deductible as a rental expense for the time
it is considered rental property. If the residence is rented for part of the year, only the amount that covers the
rental period is deductible. If a portion of the residence is rented, the deductible portion must be allocated
and deducted on Schedule E.
Insurance premiums paid more than one year in advance cannot be deducted in one year. All taxpayers
must prorate advanced premium payments over the period covered by the policy. The only portion
deductible in the current year is that amount that covers the current year. The remainder is spread out over
the life of the insurance coverage.
Can travel expenses away from home be deducted as rental expenses?
Taxpayers can deduct ordinary and necessary travel and transportation expenses of traveling away from
home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain the
rental property. If the travel was in or outside of the U.S., taxpayers should substantiate the pleasure vs.
business portions of the trip and allocate the expenses accordingly.
Taxpayers who use their personal automobile for rental-related trips may use either the standard mileage
rate or the actual expense method for business mileage. However, if the taxpayers wish to use the actual
expense method, refer them to a professional tax preparer.
The standard mileage method multiplies the miles driven for business by a standard rate. The standard rate
includes all expenses of operating the vehicle. Only parking and tolls can be added to the standard mileage
deduction. See Publication 463, Travel, Gift, and Car Expenses, for the current year standard mileage rate.
Taxpayers may use the standard mileage rate only if they meet one of these requirements:
• The vehicle was owned and used the standard method the rst year the vehicle was placed into service
or
• The vehicle was leased and used the standard method for the life of the lease
The actual expense method gures the deduction based on a variety of factors, including gasoline, oil,
repairs, insurance, and rentals and may even involve depreciation or the value of a vehicle provided by the
taxpayer’s employer.
This lesson discusses only the standard mileage rate. If taxpayers wish to use the actual method, refer them to
a professional tax preparer.
Are repairs and improvements deductible?
Taxpayers often misunderstand when an expense qualies as a repair or an improvement. A repair keeps
the property in good operating condition; the cost is a current year deduction. An improvement adds to
the life or material value of the property, prolongs its useful life, or adapts it to new uses. This cost must
be depreciated over the recovery period for the improvement. The total cost of an improvement includes
material, labor, and installation.
Taxpayers can elect to expense repair, improvement, or purchased items that might otherwise have to be
capitalized. Items that cost $2,500 or less can be expensed immediately by using the de minimis election
in the regulations. When the taxpayer makes this election, it applies to all eligible items paid during the
year. Note that this is not a Section 179 expense election, which is shown on Form 4562, Depreciation and
Amortization. Instead, the expense is shown as repairs or other expense on Schedule E.