 Most of this information comes from Publication 527 Residential Rental Property, including Rental of Vacation Homes Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused online. One income, remember, and the first half of the income tax formula is in essence an income statement. However, it's just an outline. Other forms and schedules flow into these line items, like the Schedule E, which in essence is an income statement in and of itself, having rental income minus rental expenses, the net rental income in essence, rolling into line one income of our income tax formula. So in a prior presentation, we started talking about the situation, which is the easiest, most straightforward situation, least convoluted situation where we have rental property that doesn't have personal use related to it. So we simply have the rental property. It's just rental property as opposed to a home that we're renting partially or a part of it or rental property that we use partially for a vacation or personal use situation. So we want to think about that situation, which is most clean cut where we simply have property that is just rental property. And then once we have those concepts down, we can take those concepts, which will generally apply to the more convoluted situations where we have those mixes between personal and business, and then try to think about the differences where we have to parse out the business versus personal kind of stuff. All right. So we're continuing on types of expenses. So listed below are the most common rental expenses, noting that with the rental expenses, it's kind of like the schedule C situation with business income. They usually make sense, right? Rental expenses are typically those ordinary and necessary type expenses you needed in order to generate the revenue so that we're taxed on net income as opposed to the gross income. And of course the expenses will be those that are going to be common to owning rental property typically. So advertising common expense for just about any type of business, auto and travel expenses, those get a little bit confusing because do we are going to use a mileage method or or direct method and do we depreciate the autos and stuff. But the use of the auto like a business normal business, you would expect to be an ordinary and necessary expense cleaning and maintenance, clearly could be a component. Commissions, we have depreciation. That's a big one because the rental property in and of itself is a huge cost and depreciating that cost becomes important. Insurance, common business type of expense, interest. So obviously there could be a loan and this time the loan of course was necessary for the financing to get the capital in order to have the rental property. So the interest on that loan would be business related as opposed to interest on say a personal car or something like that where the interest would be personal in nature. Legal and other professional fees, common business expense, local transportation expenses, management fees, which is something more common to the rental sector because you might have management fees that you're going to be paying as a common kind of practice within the industry. Mortgage interest paid to banks. So now we've got the interest specifically for the loan that was taken out for the possibly the rental property of course, right? Whereas possibly interest other interest might be for other loans other than the direct mortgage itself but applied to the rental property points which kind of coincides with the interest. It's kind of a messy situation. We might dive into a little bit more detail shortly. Rental payments and repairs, clearly taxes and utilities quite common. All right depreciation. Depreciation is a capital expense. It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. The general idea with depreciation, you could see it for like equipment which is kind of more straightforward in some ways because if you buy a piece of equipment the idea would be can I expense it this year and oftentimes it's going to say no it's too big of an item. We need you even though you're on a cash based system to do it and a cruel type thing put it on the books as an asset meaning it's not on the tax return generally because we don't have the assets we don't have a balance sheet on the tax return although we might have a depreciation schedule on the tax return and then we depreciate it over its useful life which means that's where we see it on you know the schedule E when we're allocating the cost over the useful life and then they might throw in some other kind of concepts with the depreciation like 179 deductions and special depreciation and so on with the rental property obviously the property in and of itself becomes a huge cost and then being able to allocate that cost over some period of time becomes quite important. The the rental property itself is a little bit more confusing than other type of of rental other type of assets because when you buy real estate then the real estate itself might go up in value whereas most things go down in value because they deteriorate if you buy a forklift you buy a car by a truck those things go down in value so depreciating the cost makes sense from that perspective as well because we're going to lower the value of the asset and expense it over time the same concept would apply to the building of a rental property because it will have wear and tear over time however many other factors could increase the value of the building just in terms of location and what not location location location right so the value of the building might actually go up in terms of fair market value even as you're depreciating it allocating the cost over the life. Alright you can begin the depreciation rental property when it is ready and available for rent see placed in service under when does depreciation begin and end in chapter two insurance premiums paid in advance so if you pay an insurance premium for more than one year in advance you can't deduct the total premium in the year you pay it so here we come with this accrual versus cashed based thing again oftentimes rental properties on a cashed based system and if you pay in advance for things like insurance which is a common thing to have an advanced payment for then you might the iris is skeptical that you're taking advantage of a cashed based system by taking more expense up front by expending the cash in a prepayment so then you have to do it like an accrual kind of thing because the iris doesn't want you to do that here so for each year of coverage you can deduct only the part of the premium payment that applies to that year that's an accrual kind of concept see chapter six of publication five three five for information on deductible premiums interest expense you can deduct mortgage interest you pay on your rental property when you refinance a rental property for more than the previous outstanding balance the portion of the interest allocable to loan proceeds not related to rental use generally can't be deducted as a rental expense chapter four publication five three five explains mortgage interest in detail so the general idea with interest would be if it was on a personal loan like you got your own interest on a car that's your personal car not the business car then you would think that you wouldn't be able to deduct it because it's personal but if you needed to finance you took out a loan most likely a loan to purchase the home or purchase the rental property and if it's just rental property you're using the property just for rental use then you would think that the that you needed to rent the money meaning get the capital take out the loan in order to get the property so it's an ordinary necessary expense and the rents on the loans is interest so it's the general idea but it can get a little bit messy with regards to the interest and then when you get into points what's interest versus other things and then if you had a personal and business use of property then then it gets messy in terms of the loan parsing out between personal and business again