Rental Income and Expenses

Rental income is any payment receivable of the use of property. Generally the cash you receive for the use of real estate or personal property is taxable to you as Rental income. Most individuals operate on a cash basis, which means they count their rental income as income when it is actually or constructively received and deduct expenses as they are paid. Some specific types of income are, amounts paid to cancel a lease, advance rent, expenses paid by tenants and security deposit. There are special rules relating to the rental of real property that you also use as your main home or your vacation home. If you do not use the rental property as a home or for personal use and you are renting to make a profit, your deductible rental expenses can be more than your gross rental income, subject to certain limits.

Canceling a Lease

If your tenant pays you to cancel a lease, the amount you receive is considered rent. The payment will be subsequently added to the income irrespective of the accounting methods used.

Property or services

If you receive property or services, instead of money, as rent, include it in the fair market value of the property.

Vacant Rental property

If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses including depreciation, for managing and maintaining the property while it’s vacant.

Repairs and improvement

You can deduct the cost of repairs of your rental property, but you can’t deduct the cost of improvement. Rather you recover costs of improvements by taking depreciation.

Rental Expenses

This section discusses expenses of renting property that you can ordinarily deduct from your rental income. Publication 527, Residential Rental Property and IRS includes information on the expenses you can deduct if you rent a condominium or cooperative apartment, if you rent part of your property or if you change your property to rental use. Rental expenses includes vacant rental property, pre- rental expenses, depreciation, expenses for rental property sold, part interest and uncollected rent.

Types of expenses include advertising, cleaning, commission, depreciation, insurance, interest, legal fees, local transportation expenses, management fees, mortgage interest, rental payments, and tax, tax returns and travel expenses.

Rental real estate activities are generally considered passive activities and the amount of loss you can deduct is limited. Generally you cannot deduct losses from rental real estate activities unless you have income from other passive activities.

Questions:

• What is Rental income?
• What are Rental expenses and losses?