A unique set of tax responsibilities are associated with rental properties. If you own rental property, read on to learn more about your tax obligations related to rental income.
What is Rental Income?
Rental income is any payment you receive for the use or occupation of your property. While rental income is taxable, that does not mean that every penny you collect in rent is taxable. You can reduce the amount of your rental income by deducting certain expenses associated with your rental property, such as maintenance expenses. Let’s look at some specific deductions related to rental income.
Am I Eligible for Deductions Related to Rental Income that I Earn?
Per the IRS, expenses of renting property can be deducted from your gross rental income. For example, costs related to servicing, managing, and maintaining the rental property are generally deductible. Those expenses include cleaning service, homeowner association dues, condo fees, management fees, pest control, lawn maintenance, insurance premiums, property taxes, and even advertising the property.
If your rental property is vacant, the expenses you incur for maintaining it are still deductible. As long as the expenditures you deduct are not excessive and remain in routine upkeep, they are acceptable.
You can even deduct travel expenses you incur when going to and from your rental property. Just be sure your travels are expressly related to checking on the property and/or conducting business or tasks related to the property’s maintenance and upkeep. Any personal costs associated with such a trip are not deductible and must be separated from the rental property-related travel expenses.
Rental expenses are usually deducted in the year you pay them.
How is Rental Income Reported to the IRS?
Rental income is reported on your tax return for the year you receive it, in other words, when the funds are credited to your bank account. This is referred to as “constructively receiving income” by the IRS and is detailed in IRS Publication 538.
There are several unique situations that you may encounter as a landlord. For example, advance rent, security deposits, tenant-paid expenses, services in place of rent, and personal use of a rental property. Let’s look briefly at these now.
Advance rent is money received before it is due or before the rental period is covered. This income must be included in your rental income in the year you receive it, regardless of when it is due, or the period it covers.
Security deposits are not included in rental income if that money will be returned to the tenant when their rental period ends. However, suppose you retain part or all of the security deposit. In that case, if the tenant does not meet the lease agreement terms, that amount must be included in your rental income for that year.
Expenses Paid by Tenant
Suppose a tenant pays for rental property-associated expenses. In that case, that is considered rental income, and you must claim it as such in the year it is received. Those can be deducted if that amount includes any deductible rental property expenses. The IRS provides more detailed information on this topic in IRS Publication 527.
Services instead of Rent
Suppose you receive services instead of money for rent. In that case, the fair market value of those services must be included in your rental income. Suppose the services are provided at a mutually agreed upon exchange rate. In that case, that amount is the fair market value of the services.
Personal Use of Rental Property
Suppose you use your rental property (i.e., a vacation home, condo, etc.). In that case, your expenses must be divided between personal and rental use. The IRS provides information on how to do this in IRS Publication 527.
What Else Do I Need to Know about Rental Income?
There are a few other tips you need to know about how to handle rental income taxes. For example, if you make general repairs to your rental property, those are deducted in the year you make them. However, suppose you make improvements to your rental property, such as adding on or making other significant changes to improve your property. In that case, those improvements are capitalized and depreciated over time per the IRS depreciation tables.
The best way to determine precisely what to do regarding rental income taxes is to rely on the services of a qualified accountant or CPA to guide you through the ever-changing tax laws. That way, you’re sure to take advantage of every deduction due to you within the confines of the law.