Tax Reporting Requirements and Deductions for Rental Properties

Owning an investment property can be a great way to boost your financial security and work toward financial independence. Residential rental property can include a single house, apartment, condominium, mobile home, vacation home or similar property.

You may have heard that buying a rental property can complicate your taxes. It’s true that rental property taxes are more complex than ordinary income taxes. All rental income must be reported on your federal tax return in the year it is received, and rental property expenses should be claimed in the year the expense was paid.

In addition to normal rent payments, there is other income that should be reported. For example:

-Advanced rent payments
-Security deposits that are used as a final payment
-Payments for canceling a lease
-Expenses paid by a tenant for property maintenance that are not deducted from the tenant’s rental payment
-Property or services received in lieu of money for rent
-Lease payments with option to buy

Note that for some of the payments above, there are other considerations which could impact what is reported as income. For example, if the security deposit will not be applied towards rent, it would not be considered income.

Rental property owners can reduce their tax liability by deducting expenses associated with property ownership and maintenance. Deductible expenses could include:

-Mortgage interest
-Property tax
-Property insurance
-Operating expenses (such as utilities)
-Advertising
-Depreciation
-Repairs

Rental property owners can also claim the cost of materials and supplies for the upkeep of the rental property.

Note that rental property owners cannot deduct the cost of improvements – those expenses would can be claimed through depreciation. Rental income is reported on your tax return using Form 1040, schedule E. On this form, you list your property’s rental revenue, expenses, and depreciation.

Rental property owners should keep good records of all income and expenses – including copies of rental payment checks or canceled checks and receipts for expenses – as all reported income and deductions will need to be substantiated in the event of an IRS audit.

To learn more about tax reporting requirements and deductions for rental properties, contact US Taxes, Inc. at inquiries@ustaxesinc.net or 1-609-588-8181.