At the same time you may be able to claim all your rental expenses, even if you end up with a loss, or your loss may be subject to certain limitations.

Rental income is considered passive income for purposes of the passive-loss rules limitation (except for qualified real estate professionals).

You can usually deduct passive activity losses only up to the amount of income you receive from rent and other passive activities. The passive-loss rules determine if you can take the loss against other income. If you can´t, then you have to carry forward the loss into another year, offsetting that year´s passive income.

If you materially and actively participate in the rental activity, then the passive activity limits apply and you may be able to deduct a loss of up to $25,000 against ordinary (non-passive) income such as your wages or investment income..

You actively participate in the rental activity if you make key management decisions such as whom to rent to, the rental terms, approving capital expenditures, etc. You also can show active participation if you arrange for others to provide services. Active participation does not require regular, continuous, substantial involvement with the property.

In order to satisfy the active participation test, you must own at least 10% of the rental property.

• $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified.
  

If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above.

If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI.

Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance.

Some of the most common rental expenses that you can deduct are:

• Advertising;
  

• Commissions;
  

• Auto and travel expenses (while managing and maintaining your property);
  

• Management fees;
  

• Loss from casualties or theft;
  

• Depreciation (as a capital expense, depreciation is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property);
  

You report rental income on Form 1040, Schedule E, page 1, and you deduct rental expenses in the expenses section of Schedule E. You report rental income of property other than real estate in the Other Income section of Form 1040.

You will need to complete Form 4562, Depreciation and Amortization, if you are claiming depreciation on your rented property.

For passive activity loss limitations you need to fill out Form 8582.

And yes, it’s true, things do get even more complicated when you have several properties rented or partially rented (vacation homes included), so, as always, you are encouraged to ask for professional help to make sure you are taking full advantages of the tax laws.