If you receive cash or fair market value of property for the use of real estate or personal property it is taxable to you as rental income. Expenses of renting property can generally be deducted from your rental income. Those income and expenses related to real estate rentals are reported on Form 1040 Schedule E. If substantial services are provided that are primarily for your tenant’s convenience that income and expense is reported on Form 1040 Schedule C. Income and expenses related to personal property rentals are reported on Form 1040.
Most individuals operate on a cash basis which means they count their rental income as income when it is actually or constructively received and deduct their expenses as they are paid. Some specific types of income are:
- Lease Cancellation – If a tenant pays you to cancel a lease this money is also considered rental income and should be reported in the year you receive it.
- Advance Rent – Any advance rent pain in income should be included in the year you receive it regardless of the period covered or the method of accounting used.
- Tenant Expenses – If your tenant pays any of your expenses those payments are considered rental income. Some of the expenses may be deductible.
- Security Deposits – Security deposits should not be considered in your income if you would be required to return it to the tenant at the end of the lease. But if you keep part or all of the security deposit because the tenant has broken the lease terms this money is taxable income in the year the determination is made. If you keep the security deposit due to damaged property the security deposit is not taxable to you. If the deposit is used as a final month’s rent the money would be included as income when you receive it rather than when you apply it to the last month’s rent.
Here are some examples of expenses that may be deducted from your total rental income:
- Depreciation – When you place your rental property in “service” you begin to depreciate it. Some or all of your original acquisition and improvement costs may be recovered by using Form 4562 (to report depreciation) beginning in the year your rental property is first placed in service and beginning in any year you make improvements or add furnishings.
- Repairs – Repairs keep your property in good working conditions but do not add to the value of your property.
If you operate your property on a cash basis as a taxpayer you cannot deduct Uncollected Rent as an expense because you have not included those rents in income.
For more information on how to report and structure your own rental properties appropriately schedule a consultation with Lindemeyer and we will head you in the right direction.