Dear TaxGuru,

Currently I hold a lease with the option to purchase on a home. It is an investment, and not my principal residence. I have been able to sublease the property, and collect more rental income from my subtenants than I pay to the current owner, effectively creating a positive cash flow. Is this taxable income? If so, am I entitled to the same tax deductions as RE investment property owners?

Thank you,
Rob

Rob,

I had to do a little research on this and I would simply recommend that you adhere to the IRS rules here. "Any reasonable expenses that are incurred in connection with an income producing activity is deductible".

Firstly, in my opinion, the sub-lease income is definitely going be considered rental income to you. This has to be reported on Schedule E of the 1040 tax return. Now, the problem is the lease income you are paying, and whether or not you can offset against the rental income. Here, the situation appears to be cloudy from my standpoint.

I could not as today find a similar case study or situation like yours, I am tempted to recommend that you offset the lease payments against the rental income and also take items of expenses such repairs and painting etc., that is all reasonable expenses that you may have spent into sub-leasing this property.

Now, you cannot take depreciation of the building as this is not your owned property. Further, I would add a small note to the tax return explaining that this property is a leased property and that you have sub-leased this property and this is activity is going to be reported on schedule E.

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