Rental & Real Estate Income

Most individuals operate on a cash basis, which means they count their rental income as income when they actually or constructively receive it, and deduct their expenses when they pay them.

Rental income is any you receive for the use or occupation of property. This is reported on a form Schedule E. You must report rental income for all your properties which includes:

Advance rent

This is any amount you receive before the period that it covers. The IRS provides this helpful example:

If you sign 10-year lease to rent your property. In the first year, you receive $5,000 for the first year’s rent and $5,000 as rent for the last year of the lease. $10,000 counts as the total income in the first year.

Amounts paid to cancel a lease

If your tenant pays an expense such as a water bill that is not included in the lease, the amount of the bill must be included in the rental income.

Security deposits

If a security deposit was used as a final payment of rent, it is considered advance rent and must be reported as income.

Property or services received

If you receive property or services instead of money as rent, it must be included in your income. This counts as the fair market value of the property or services.

The IRS provides the following example: If your tenant is a painter and offers to paint your rental property instead of paying rent for two months. If you accept the offer, include in your income the amount the tenant would have paid for two months worth of rent.

Don’t forget, you can report your rental expenses.

However, it is important that you keep all records of your expenses. Here are some examples of rental expenses.

Depreciation

You can depreciate the exhaustion, wear and tear of the property itself by using Form 4562. Once you place it in service, you can start to depreciate your rental property. You can also recover some or all of the original acquisition cost and the cost of improvements.

Repair Costs

In order to upkeep your property in good condition, you may find yourself paying for repairs. You can report the repair costs as long as they don’t add to the value of the property.

Operating Expenses

You can also report other necessary expenses for the operation of the property. For example, you can report salaries of employees or fees charged by independent contractors (groundkeepers, bookkeepers, accountants, attorneys, etc.) for their services.

For more information on rental income, click here to go to the IRS page.

This entry was posted on Thursday, November 12th, 2020 at 8:36 pm and is filed under Income. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.