Rental Income Tax
If you own rental real estate, you should be aware of your federal tax responsibilities. All rental income must be reported on your tax return, and in general the associated expenses can be deducted from your rental income.
However, you should also understand that there are certain rental expenses you may deduct on your tax return on Schedule E if you receive rental income. These expenses include mortgage interest, property tax, operating expenses, depreciation, and repairs.
What is Considered Rental Income?
You generally must include in your gross income all amounts you receive as rent. Rental income includes:
- Normal rent payments including any advance rent received such as first and last month’s rent
- Rental expenses paid by the tenant in lieu of a rent payment
- Security deposits not returned to the renter
- Property or services received in lieu of a rent payment
What Deductions Can I Take as an Owner of Rental Property?
If you receive rental income, you can deduct the ordinary and necessary expenses for managing, operating and maintaining your rental property. Ordinary expenses are those that are common and generally accepted in the business. Rental expenses can be deducted from the time the property is made available for rent. However, you cannot deduct the loss of rental income during the period in which the property is vacant.
Necessary expenses are those that are deemed appropriate, such as:
- Mortgage interest
- Real estate or property tax
- Cleaning, maintenance and repairs
- Commissions and management fees
- Legal expenses
- Travel expenses
You may not deduct the cost of improvements. An improvement adds to the value of your property, prolongs its useful life, or adapts it to new uses. Examples are adding a deck, a new fence or roof. The cost of improvements is recovered through depreciation.
How Do I Report Rental Income and Expenses?
Rental income and expenses are generally reported on Schedule E, Supplemental Income and Loss. Rental income must be reported in the same year in which it is received. If you do not rent your property to make a profit, you can only deduct your rental expenses up to the amount of rental income. If you rent part of your property, that must be separated from property used for personal purposes.
What Records Should I Keep For Rental Expenses?
Maintain good records relating to your rental activities, including the rent and the rental repairs. Retain all receipts. You must be able to document this information if your return is selected for audit.
If you are audited and cannot provide evidence to support items reported on your tax returns, the expense deduction will be reversed andyou may be subject to additional taxes and penalties
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