How to Report Rental Income

If you own rental property, you’ve probably had to deal with on-site issues from time to time. These problems include property repairs along with a slew of other inevitable challenges. In spite of all these surprises, the least expected and most unwelcome of problems often happens during the tax season. The surprise we are talking about is one of the most common things owners overlook: how to report rental income.

Reporting rental income may seem like a straightforward process, however many people get blindsided by specific factors and issues associated with it. How you handle those issues during the year has a significant impact on your taxes at year-end. That’s why it’s important to understand how it works.

The IRS defines rental income as payment you receive from the use or occupation of owned property. In general, any amount you collect as rent has to be included in your gross income and needs to be reported in the year received. More often than not, you’ll incur expenses from the rental property, but that’s not always a bad thing. Although it may be a pain to pay them at the time, you can deduct these expenses from your gross rental income. Just make sure it is deducted in the same year they are paid and you are good to go.

Examples of Rental Income That Must Be Reported:

The first form of rental income that needs to be reported is rent paid in advance. This type of rent is any amount you receive before the period that it covers. Regardless of the period, it spans over or the method of accounting you use, rent paid in advance needs to be in your rental income report for the year it was received.
The second form of rental income that needs to be addressed is security deposits. Do not include a security deposit when you report rental income if it’s going to be returned to your tenant at the end of the lease. But, if your tenant does not live up to the terms of the lease and you decided to keep a portion or all of the security deposit, it’s okay to include it when you report rental income in that year.

Tenant Paid Expenses

Let’s say you are on vacation with the family. All of a sudden, you get a call that there is an issue at your Fresno rental unit. In the middle of a scorching summer, the air conditioning unit stops working. Your tenant is trying to get it started again but realizes there is nothing else they can do. Your only option is to call a repairman to come and fix it. Instead of paying the repairman directly yourself, the tenant pays them. Then they deduct the expense from next month’s rent check. Do you know how to report the income for that type of situation?

It may seem a bit confusing, but reporting property services in lieu of rent is a lot easier than you think. If you receive property services, instead of money as rent, just make sure to include the fair market value of the property or services.

Personal Use of a Vacation Home

The rules about how to report rental income are a bit different for vacation homes. 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.

All of the appropriate forms for reporting rental income can be found on the IRS website. Reporting rental income can be confusing, to say the least. That’s why it’s important to consult with a professional who can assist you in proper income reporting. This will make your reporting tax time go a lot smoother. For additional information, feel free to contact us at 559-431-8334.

By David Olson, CPA
Manager at WHH