Special Rental Allowance Can Pay Big for Property Owners

If you own rental property, you may qualify for up to $25,000 in a special rental allowance. Interested?

To qualify for this $25,000 deduction, you must:

  • Own at least 10% of the interests in the rental property at all times during the year. This includes any interest your spouse holds.
  • Actively participate in the operations of the rental property. Active participation requires you to contribute in a significant way, such as making key management decisions or arranging others to provide services. Examples include approving new tenants, deciding on rental terms and approving capital or repair expenditures.

However, as with most deductions, the $25,000 special allowance is subject to a limitation. The $25,000 amount is reduced if your Adjusted Gross Income (AGI) is greater than $100,000 and is completely phased out when it reaches $150,000.

Here are a few things rental property owners should keep in mind between now and year end:

  1. Actively participate: If you own rental property as a passive investment, consider becoming an active participant. It may require only a minimal amount of extra time to qualify for the $25,000 deduction allowance.
  2. Reduce your income: If your AGI will be higher than the $150,000 phase-out amount, talk to your tax professional about ways to reduce it before year-end to allow you to qualify for the deduction. Examples include depreciation elections and IRA contributions.
  3. Keep excellent records: Take the time to keep track of all expenses related to your rental property. Besides saving a lot of time and money in the event of an audit, the extra paperwork can provide you with many significant deductions you may not otherwise consider. Some of the lesser known expenses such as auto and travel can quickly add up!

For veteran rental property owners familiar with passive loss rules, you may be wondering how this works. While rental income or loss generally falls under the passive activity loss rules, this deduction can be taken regardless of the passive loss rules. See your tax advisor.

And, spend some time on your rental property before year-end – it could be well worth your while.