CONTACT INFO:

  • hello@goldaccountingtax.com
  • +1 (561)-331-7011
  • 2000 PGA Blvd Suite 4440 PMB 167 Palm Beach Gardens, FL 33408

Rental Real Estate Income, Deductions and Recordkeeping

If you own rental real estate, it’s crucial to understand your federal tax obligations. All rental income must be reported on your tax return, and generally, the associated expenses can be deducted from your rental income.

Cash Basis Taxpayers

As a cash basis taxpayer, you report rental income for the year you receive it, irrespective of when it was earned. Correspondingly, you typically deduct rental expenses in the year you pay them.

Accrual Method Taxpayers

If you employ an accrual method, you report income when it is earned, rather than when received, and deduct expenses when incurred, not when paid. Most individuals use the cash method of accounting.

Below are some essential tips on tax reporting, recordkeeping requirements, and deductions for rental property to help you avoid errors.

What is Considered Rental Income?

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

In addition to regular rent payments, other amounts may also be considered rental income and must be reported.

Advance Rent

Advance rent is any amount you receive before the period it covers. Include advance rent in your income for the year you receive it, regardless of the period covered or the accounting method used. For example, if you sign a 10-year lease and receive $7,000 for the first year’s rent and $7,000 for the last year of the lease in the first year, you must include $14,000 in your income for that year.

Security Deposits

Security deposits used as a final rent payment are considered advance rent and should be included in your income when received. Do not include a security deposit in your income if you plan to return it to the tenant at the end of the lease. However, if you retain part or all of the deposit during any year due to tenant non-compliance, include the retained amount in your income for that year.

Lease Cancellation Payments

If a tenant pays you to cancel a lease, this amount is considered rent and should be included in your income for the year received.

Tenant-Paid Expenses

If a tenant pays any of your expenses, include these payments in your rental income. You can deduct these expenses if they qualify as deductible rental expenses. For instance, if a tenant pays the water bill for your property and deducts it from the rent payment, include both the utility bill and the rent payment in your rental income.

Property or Services Received

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. For example, if a tenant offers to paint your rental property instead of paying rent for two months, include the fair market value of the painting services as rental income.

Lease with Option to Buy

If your rental agreement includes an option for the tenant to buy the property, the payments received are generally considered rental income.

If you own a partial interest in rental property, report your share of the rental income from the property.

Deductions for Rental Property Owners

If you receive rental income from a dwelling unit, you may deduct certain rental expenses on your tax return. These expenses include mortgage interest, property tax, operating expenses, depreciation, and repairs.

Ordinary and Necessary Expenses

You can deduct ordinary and necessary expenses for managing, conserving, and maintaining your rental property. Ordinary expenses are common and generally accepted in the business, while necessary expenses are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.

Repairs and Maintenance

Deduct the costs of materials, supplies, repairs, and maintenance to keep your property in good operating condition. Deduct the tenant-paid expenses if they qualify as deductible rental expenses.

Improvements

You cannot deduct the cost of improvements. An improvement is any amount paid for a betterment, restoration, or adaptation of the property to a new or different use. The cost of improvements is recovered through depreciation.

Depreciation

You can recover some or all of your improvement costs by using Form 4562 to report depreciation, starting in the year your rental property is first placed in service or when you make an improvement. Only a percentage of these expenses are deductible in the year incurred.

Reporting Rental Income and Expenses

Report your rental income and expenses on Form 1040 or 1040-SR, Schedule E, Part I. List your total income, expenses, and depreciation for each rental property on the appropriate lines of Schedule E. Use the Instructions for Form 4562 to calculate the amount of depreciation to enter on line 18.

If you have more than three rental properties, complete and attach additional Schedules E as needed. Fill in the “Totals” column on only one Schedule E, which should reflect the combined totals of all Schedules E.

If your rental expenses exceed rental income, your loss may be limited by the passive activity loss rules and the at-risk rules. Refer to Form 8582 and Form 6198 to determine if your loss is limited.

For personal use of a dwelling unit that you rent, your rental expenses and loss may be limited. See Publication 527 for more information.

Recordkeeping

Good records help you monitor your rental property’s progress, prepare financial statements, identify receipt sources, track deductible expenses, prepare tax returns, and support items reported on tax returns.

Maintain comprehensive records of your rental activities, including income and expenses. Document this information to substantiate items reported on your tax returns if audited. You must provide evidence to support your claims, which may include receipts, canceled checks, or bills. Keep track of any travel expenses for rental property repairs, and ensure your records follow the rules outlined in Publication 463.

Good records are essential for tax preparation. These records must support the income and expenses reported and are generally the same records used to monitor real estate activity and prepare financial statements.

Leave a Comment

About us

At Gold Accounting Tax, we know you want to be successful in real estate.

In order to do that, you need an in-depth understanding of your financials at any given time.

We understand because we are real estate investors ourselves and understand the specific challenges real estate businesses experience.

Opening Hours

Mon - Wed 8:00 - 17:30,
Thur 8:00 - 17:00,
Fri 8:00 - 14:00,
Sat & Sun - CLOSED