Renting out a property can be an excellent way to earn a living or to supplement your income from a job. It’s important to understand what types of information you’ll need to include on your tax return and to keep accurate records to avoid penalties.
What’s Considered Rental Income?
You’ll have to report all rental income on your tax return. That includes any regular rent payments, as well as rent paid in advance. If a tenant pays you to cancel a lease, that also counts as rental income. If a renter pays any of your bills, such as utilities, or provides services in lieu of regular rent payments, the cost of those bills or the fair market value of the services provided must be counted as rental income.
If a tenant pays a security deposit to cover the last month’s rent, that should be counted as rental income when you receive the money. Don’t include a security deposit in your income if you plan to return the money when the tenant moves out. If you keep all or part of a security deposit to cover damage to the property or a violation of the lease, that money needs to be counted on your tax return as rental income.
Which Expenses Can Be Deducted?
You can deduct property taxes, mortgage interest, management costs, maintenance, utilities and insurance. You can also deduct expenses paid by a tenant if the Internal Revenue Service considers those deductible rental expenses.
You may not deduct the cost of changes to improve or restore a property or to convert it to a different use. You can deduct depreciation to recoup some or all of the cost of improvements.
How to Prepare for and File Your Taxes
Keeping accurate and complete records throughout the year will make things easier when it comes time to file your taxes and will help if you get audited. Include all money received for rent and all costs associated with ownership, management, maintenance and repairs, as well as costs to travel to the rental property to perform maintenance and repairs.
In most cases, you’ll need to report your rental income and expenses on Form 1040, Schedule E. The IRS has instructions to help you figure out which income and expenses should be included and how to calculate depreciation. If your expenses are greater than your rental income, or if you use a property that you rent out as a personal residence some of the time, the amount of loss you can deduct on your tax return will be limited.
Seek Professional Assistance
Owning a rental property can be lucrative, but you need to be mindful of how it can affect your taxes. Talk to an accountant so you understand what you must include on your tax returns, and keep detailed records of all income and expenses. If you don’t want to handle record-keeping yourself, hire professionals to make sure everything is in order.
This article is intended for informational purposes only and should not be construed as professional or legal advice.