• The IRS provides special income tax rules for investment properties.apartment for rent image by dead_account from Fotolia.com
  
  The Internal Revenue Service has special rules regarding profit earned through investment property rentals. Rental profits provide many different tax benefits for landlords that are able to understand the tax rules associated with generating rental property income. If the taxpayer decides to sell the investment property, then the profits realized during the transaction is regarded as capital gains.
  
  

Rental Fees, Services and Tenant's Repairs

• All rental income is recognized as gross income. This includes costs for repairs the tenant provided or the value of services the tenant offers in exchange for rent.
  
  

Semi-Investment Income/Semi-Personal Residence

• Property that has a dual purpose is treated differently. If the homeowner rents the property out for more than 15 days, then the rent is considered income. However, if the property is rented for less than that amount, then the IRS allows the taxpayer to exclude the rent from gross income. The taxpayer may only claim rental property costs as deductible expenses if the rent was counted as gross income.
  
  

Investment Expenses and Repairs or Capital Improvements

• The IRS allows owners to deduct the costs associated with maintaining the property as an investment. Owners may deduct a variety of costs such as mortgage loan interest and credit card interest for items purchased for the rental property. The deduction includes real estate property tax assessments, the fees expended for advertising the rental property, property management fees and depreciation costs. Losses suffered as a result of a casualty are also deductible.
  
  Home repair costs which do not add to the property value are deductible from gross income. The IRS considers a legitimate repair fee as one covering ordinary or necessary items such as repainting or fixing leaky faucets. However, improvement costs which add to the value of the property are not immediately deductible but must be depreciated.
  
  

Depreciating Property

• The IRS allows owners to depreciate improvement costs or real estate expenses if the property is used for investment purposes and has a finite useful life (able to lose value over time). As such, land is not depreciable because it does not become obsolete or used up. Land preparation expenses such as landscaping fees may be depreciated if its useful life is determined by the associated real property's useful life.
  
  Depreciation begins when the taxpayer starts any investment activity--even if the property is temporarily vacant, so long as it is actively being advertised. The depreciation period ends when the cost is recovered or the property is retired from use through sale, exchange or conversion to personal use.
  
  

Cost Basis

• Basis is used to determine the profit the owner has recovered from the investment property. The basis typically equals the amount the homeowner paid for the property and specific fees incidental to the financing fees and settlement costs.