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Don’t Miss a Deduction: Report Everything Related to Your Real Estate Rentals

Whether you become a landlord under duress (because you own property you can’t sell) or because you feel destined to become a Donald Trump protégé, you must report those activities on Schedule E (or Form 8825 if you’re a business).

Fundamentally, you start with including all amounts you receive as rent in your gross income. Rental income is any payment you receive for the use of or occupation of property, regardless how paid. Taxpayers with rental income typically use the cash method to report it, so this guidance is for them. If you report your income on the accrual basis, consult a tax advisor for more specific instructions.

Expenses of renting property can be deducted from your gross rental income, typically in the year you pay them. IRS Publication 527, Residential Rental Property, provides detailed instruction on the expenses you can deduct, and we can sum it up for you here:

  1. Rental income: Such income is reportable when received, not when due. Generally, you must report rental income on your tax return in the year you actually receive it, whether it’s paid in advance or in arrears. You can’t defer this income, regardless of what period these rent payments apply to.
  2. Security deposits: These payments are not reportable as income unless the deposit becomes forfeitable “for cause.”
  3. Property or services in lieu of rent: If you agree to apply tenant property or services as rent, the fair market value of that property or service is your rental income when it is delivered or performed on your behalf. If the benefit you derive from those services is applicable to the rental property (for example, pest control treatments), you may also record the amount as an expense. However, if the benefits provided are for your personal use as the landlord, you won’t have a corresponding deduction.
  4. Expenses paid by tenant. If your tenant pays any of your expenses, the payments are considered rental income and must be included in your income. As before, these expenses may also be deductible rental expenses.
  5. Rental expenses. All expenses related to renting your property, including maintenance, insurance, taxes and interest, can generally be deducted from your rental income.
  6. Personal use of real property. If you own a vacation home or other dwelling unit which is also available for rent, the related expenses must be split between rental and personal use. More than a nominal personal use of the property can limit deductible expenses to the amount of rent received.

For more information on rental income and expenses see Publication 527. For help filing your taxes with rental information, contact our experienced professionals at Patrick & Robinson CPAs via E-mail or call us at 904-396-5400.

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