Eight Tips About Rental Income and Expenses

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Do you rent property to others?

If so, you’ll want to read the following eight tips from the IRS about rental income and expenses. For more information, contact your tax professional or professional landlord.

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use of 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.  Publication 527, Residential Rental Property, includes information on the expenses you can deduct if you have rental property. This publication covers topics like:

  1. When to report income. Rental income can be reported two ways, “Cash” or “accrual”. Most landlords generally report rental income on your tax return in the year that you actually receive it. This is the cash method. Accrual method is reporting income when the income is owed, whether you received it or not.
  2. Advance rent. Advance rent is any amount you receive before it is owed. This is still income. Advanced rent will be included in your rental income in the year you receive it.
  3. Security deposits. Security deposits are not income! It does not get reported for taxes because it is intended to be returned to your tenant at the end of the lease. But, if you keep part or all of the security deposit because your tenant defaults on the lease or causes damage that does not get fixed before they leave, then it is considered surrendered income and needs to be reported… in the year it is surrendered.
  4.  Property or services in lieu of rent.  If you receive property or services, instead of money, as rent, include the agreed fair market value of the property or services in your rental income.  This will need to be documented with the following information or risk the IRS denying it:
  • Who was involved
  • What was exchanged and when
  • What was the agreed value (include receipts)

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.

  1. Expenses paid by tenant. If your tenant pays any of your expenses, it can be counted as income. It is a good idea to give the tenant a signed letter that you agreed to this arrangement and keep a copy of it and any receipts of the paid expense, just like “property or services in lieu of” above. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. Read “Rental Expenses” in Publication 527, for more information.
  2. Rental expenses.  Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. It must be in part of your trade or business.
  3. Personal use of vacation home. This is a tricky tax law that may require a talk with your tax professional. 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.
  4. Depreciation. Many big repairs and improvements of your rental property can be depreciated. A portion of the base cost of your rental house (not the land) can be deducted on a depreciation schedule each year for 27.5 years. A new roof, air conditioner or water heater can all be depreciated on your taxes as operating expenses. This is where a good tax professional is worth the money.

For more information about making your rental house a cash cow, Contact us.

For more information on rental income and expenses see Publication 527. This publication can be downloaded from http://www.irs.gov.


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