Income – What Is & What Isn’t
Income – What Is & What Isn’t
Landlords take in money, some being taxable, some not. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. There are other receipts that are not rent including deposits and vending machines amounts.
Rents
You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property.
When to report – When you report rental income on your return depends on whether you are a cash basis taxpayer or use an accrual method. If you are a cash basis taxpayer, you report rental income on your return for the year you actually or constructively receive it.
You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account. If you use an accrual method, you generally report income when you earn it, rather than when you receive it. You generally deduct your expenses when you incur them, rather than when you pay them. For more information about when you constructively receive income and accrual methods of accounting, see IRS Publication 538 (“Accounting Periods and Methods”).
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. For example, you sign a 2-year lease for your property and receive $800 for the first month’s rent and $800 as rent for the last month of the lease. You must include $1,600 in your income in the first year as well as any other rents received during that calendar year.
Other rent related receipt – Some receipts that are related to rent can be included in rents. Late charges are probably the most-often received income in this category.
Deposits
Do not include a security deposit or other truly deposit amounts in your income when you receive it if you plan to return it to your tenant at the end of the lease absent any claim for damages or unpaid rent at the end of the lease. Non-refundable fees, even if called deposits must be reported in the year received.
However, 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 is to be used as a final payment of rent, then, even though called a security deposit, it is advance rent that must be included in your income when you convert the deposit to rent.
Payment for Canceling a Lease
If your tenant pays you to cancel a lease, the amount you receive is rent and must be included in your income in the year you receive it regardless of your method of accounting.
Expenses Paid by Tenant
If your tenant pays any of your expenses the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses although there can be cases where the payments are income but the amount must be capitalized and depreciated over a number of years.
As an example, the furnace in your rental property stops working while you’re out of town and your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the repair payment made by your tenant as a rental expense.
As another example, your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill. Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the utility payment made by your tenant as a rental expense.
Although one could not include as income the amount paid by the tenant and not deduct the amount on an income tax return, it is usually better to do both in order to provide a paper trail of what actually occurred.
Property or Services
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. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.
For example, your tenant is a painter and you accept his offer to paint your rental property instead of paying 2 months’ rent. Include in your rental income the amount the tenant would have paid for 2 months’ rent. You can usually deduct that same amount as a maintenance expense.