Classifying & Reporting Rental Income

Owning and maintaining rental property can often be a challenging task. There are a lot of elements to manage from qualifying renters, dealing with unexpected repairs and other issues that may not be part of the playbook. In spite of all the surprises, the least expected and most unwelcome often comes at tax time. Often times little thought is given to how rental income needs to be reported or reporting obligations when rent is paid in advance. How these issues are handled during the year will have a significant impact on taxes at year end. For this reason, it’s important to understand how to properly classify and report rental income. To help taxpayers understand key reporting issues, JLK Rosenberger has provided a summary of key rental issues to consider.

Rental Income Reporting

From time to time there can be confusion among landlords as to what specific items qualify as rental income. The IRS defines rental income as payment received for the use or occupation of property. Generally, all amounts collected as rent must be included in your gross income and should be reported in the year received. When a property is rented, expenses are commonly incurred by the landlord. These expenses can be deducted from your gross rental income and should be deducted in the year they are paid. Several examples of rental income that must be reported are as follows:

  • Advance Rent – Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.
  • Security Deposits – Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But, if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. (If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.)
  • Expenses Paid by the Tenant – If your tenant pays any of your expenses, the payments are rental income and this income must be included in your rental income.

Tenant Paid Expenses Example While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment.

  • Property or Services in Lieu of Rent – 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.
  • Personal Use of Vacation Home – If you have any personal use of a vacation home or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use. If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses.
Contact Us

For most landlords rental income reporting can sometimes be confusing. To help you understand the regulations and how they apply to your situation, it’s important to work with an advisor familiar with real estate taxes. For additional information regarding rental property income and reporting, please contact JLK Rosenberger at 949-860-9902, or click here for email. We look forward to speaking with you soon.