Rental Income and Rental Expenses

If you are interested in Rental Income and Rental Expenses information or Real Estate Tax Tips the information below from Amass Magazine will be of assistance. It is recommended that you speak with your tax accountant. Amass Magazine states that you understand that the information below on rental income and expenses is only for informational purposes and Amass Magazine is not providing tax advice.

You generally must include for your rental income in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property.

Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them. IRS Publication 527, Residential Rental Property includes information on the expenses you can deduct if you rent a condominium or cooperative apartment, if you rent part of your property, or if you change your property to rental use.

When to Report Rental Income

Report rental income on your return for the year you actually or constructively receive it, if you are a cash basis taxpayer.
You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned.
You constructively receive income when it is made available to you, for example, by being credited to your bank account.

For more information about when you constructively receive income, visit the IRS website.

Advance Rent

Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Listed below is an example of advance rent in regards to rental income:

You sign a 10-year lease to rent your property.
In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease.
You must include $10,000 in your income in the first year.

Security Deposits

Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.

If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.

Expenses Paid by Tenant

If your tenant pays any of your rental expenses, the payments are rental income. You must include them in your rental income. You can deduct the rental expenses if they are deductible rental expenses. Here are some examples of rental expenses paid by tenant:

Your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill.
While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment.
Based on the facts in each example, include in your rental income both the net amount of the rent payment and the amount the tenant paid for the utility bills and the repairs. You can deduct the cost of the utility bills and repairs as a rental expense.

Property or Services in Lieu of Rent

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.

If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Here is an example:

Your tenant is a painter.
He offers to paint your rental property instead of paying 2 months' rent.
You accept his offer. Include in your rental income the amount the tenant would have paid for 2 months' rent.
You can include that same amount as a rental expense for painting your property.

Personal Use of Vacation Home or Dwelling Unit

If you have any personal use of a vacation home or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use. If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses.

Additional Rental Income Information:

If you own rental real estate, you should know how it impacts your personal tax return. Rental income must be reported on your tax return, and generally, associated expenses can be deducted from your rental income. Reviewing answers to the following common questions regarding rental property may help you understand the tax implications of rental property ownership:

What is considered rental income?

Rental income is any income you receive for the use or occupancy of property you own. Some examples are:

Rent
Payment to cancel a lease
Advance rent
Expenses paid by the tenant
Any security deposit kept because a tenant did not fulfill their part of the rental agreement

Do not include:

A security deposit you are holding with the intent of returning it to the tenant at the end of the lease
Income received from renting your home for fewer than 15 days per year

What deductions can I take as an owner of rental property?

Deductible expenses for rental property are the ordinary and necessary expenses to manage, conserve, and maintain your property. Deductible expenses include:

Advertising in the newspaper for tenants and cost of signs
Cleaning supplies
Real estate taxes
Mortgage and other interest paid for the rental property
Cost of insurance-hazard, flood, fire, or liability
Payments for service such as lawn care, pest control, and trash collection
Payments for maintenance of the property
Professional fees for tax advice and tax return preparation fees for the part of the tax return dealing with rental property
Cost of new locks and keys
Commissions paid for finding tenants
Cost of necessary transportation to and from the rental property for the purpose of maintenance, management, rent collection, picking up supplies, or checking the property (if you use your personal vehicle, either keep track of actual expenses and miles traveled or just the miles traveled)
Cost of repairs and maintenance (not improvements) to keep your property in good condition (this includes items such as repainting and fixing floors and windows)
Cost of renting equipment used for the rental property
Depreciation of the property (not including the land)
Depreciation of appliances, furnishings, and improvements
Any long distance calls associated with your rental property
The court costs for evicting a tenant
Legal fees pertaining to the rental property or tenants
Utilities
Expenses incurred when the property is not rented as long as you are actively trying to rent the property (even if you are renting it for the first time)

You cannot deduct:

Rental income lost due to vacancy
The cost of improvements which increase the value and/or extend the life of the property or modify it for a new use (includes such things as a room addition, new carpet, new appliances, fencing, or a new roof - these items can generally be depreciated)

What Are Some Things I Should Know About Rental Property?

If you rent only part of your property, certain expenses must be divided between the part used as rental property and the part used for personal purposes.

If you do not rent your property for profit, you can deduct your rental expenses only up to the amount of your rental income.

When rental property is sold, the resulting gain or loss is treated as ordinary or capital, depending on the circumstances.

The rental of personal property such as equipment or vehicles is reported as business income. You are in the business of renting personal property if the primary purpose for renting the property is income or profit and you are involved in the activity on a continuous and regular basis. If your rental of personal property is not a business, other rules for reporting will apply.

Losses from residential rental properties are subject to certain limitations. If you are considered a real estate professional, special rules apply for the reporting of income and losses. For more information, contact your local Jackson Hewitt Tax Service® office.