Tips for Filing Rental Income Taxes
Filing taxes can be a confusing process for anyone, especially if you are dealing with rental property income. Additionally, there are many tax deductions you can make for various expenditures involved with managing rental properties, so it’s essential to know what constitutes rental income and what tax deductions can be made. Even if you plan to hire a professional to file your taxes, understanding rental income taxes can inform your purchasing decisions and make tax season less overwhelming.
What constitutes rental income?
First things first, let’s define rental income. Any amount of money you receive as payment for the occupation or use of your residential property is considered rental income. Residential properties include apartments, single or multi-family homes, mobile homes, and homes and condominiums, etc. The most obvious example of rental income is monthly rent. However, there are many other types of payment that can be considered rental income by the IRS:
- Security deposit: When you collect a security deposit, you should not count it in your gross annual income. However, if the security deposit is transferred to be used as the last month’s rent payment, it should then be included in your income. Additionally, if any portion of the security deposit is retained, that portion should also be declared.
- Advance rent: Any rent payment collected in advance of the month it covers should be declared as income when it is received.
- Lease cancellation fees: If a tenant terminates a lease early and pays a corresponding fee, this is also considered rental income.
- Tenant rendered services: If a tenant performs a service in placement of a rent payment, the market value of the service can be declared as rental income.
- Lease with an option to buy: When a tenant overpays the monthly rent in order to dedicate money toward the purchase of the property, this amount can be considered rental income. If the tenant does purchase the property, the selling price will constitute all payments received after the date of sale.
- Residences: If you rent out a ‘residence’ for less than 15 days in a year, then this rent payment does not need to be reported as rental income, and no expense deductions can be made. A property is considered a residence when the owner uses it for personal reasons (not related to maintenance or repairs) for at least 14 days out of the year, or 10% of the total days the property is rented, whichever value is larger.
Tax deductions for rental income
When you own a rental property and report rental income, you may deduct a number of expenditures related to the rental property. The typical deductible expenses include property taxes, operating expenses, insurance, depreciation, advertising costs, and mortgage interest. You can also deduct payments for property management fees, property utilities, housekeeping, maintenance, and repairs. Here are some other common deductibles that may apply depending on your situation:
Claiming your home office as a business expense: If you use a room or dedicated space in your home exclusively for your rental business, expenses on this portion of your home can be deducted. You can calculate this deduction using the square footage of the office or the number of rooms it contains in relation to the total number of rooms in the house.
Deducting legal fees: If you consult a lawyer for any purpose related to your rental business, such as conducting an eviction or for legal consultation, legal expenses can be deducted. Additionally, if you hire an accountant to file your business taxes, all costs related to your rental properties can be deducted.
Deducting vehicle mileage: You can track and calculate the mileage you drive specifically for business purposes related to your rental properties, and that amount becomes deductible. The same goes for travel expenses, if the purpose of the trip is related to management, maintenance, collecting rental income, etc.
Some property improvement costs may not be deductible unless they enhance or upgrade the property. An adaptation to a different use or a restoration is typically deductible. Additionally, if you use a property for personal use for any period of time, expenses during that period must be separated from rental expenses.Â
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