Practical Tips About Rental Income and Expenses
Are you a "landlord"? Do you rent residential property to others?
If so, today I have some tips for you about rental income and expenses.
First of all, it probably goes without saying that just like with other forms of income received, you generally must include in your gross taxable income all amounts you receive as rent. Rental income is any a you receive for the use of or occupation of property you own (or rent from another but sublease to a tenant).
Expenses related to the renting out of property typically can be deducted from your gross rental income. Such expenses are generally a deduction in the year you pay them.
The following are some common issues about which landlords often have questions:
1. When to report income. If you are the typical "cash basis" taxpayer, like most individuals, you generally must report rental income on your tax return in the year that you actually receive it.
2. Advance rent. Advance rent is any amount you receive before the period that it covers. This may seem counterintuitive, but like normal rent income, you include advance rent in your rental income in the year you receive it, regardless of the period covered.
3. 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.
4. Property or services in lieu of rent. If you receive property or services as rent, instead of money, 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.
5. Expenses paid by tenant. If your tenant pays any of your expenses, the payments are rental income, and uou must include them in your gross income. You can deduct the expenses if they are deductible rental expenses. However, some such expenses may have to be capitalized as an asset and depreciated over time.
6. Rental expenses paid by you. Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. However, just like above, some expenditures are considered assets that have to be depreciated.
7. Personal use of vacation home. 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, depending on just how much personal use you have. A full discussion of this is beyond the space we have, but you need to be aware that there is a possible issue.
For more information on rental income and expenses, see IRS Publication 527, Residential Rental Property, which you can download from http://www.irs.gov.
Finally, this past fall, the IRS issued new tangible property regulations. There are elections and policies you need to consider that could have a substantial effect on what you can deduct and what you must capitalize and depreciate over time (sometimes as long as 27.5 years).
This is complex and can be burdensome to comply, and some elections needed to have been made before 2014 began. You should seek professional advice on how to deal with these new rules.
