Generally, cash or the fair market value of property you receive for the use of
real estate or personal property is taxable to you as rental income. Income and expenses
related to real estate rentals are usually reported on Schedule E Form 1040.
Income and expenses related to personal property rentals are reported on Schedule
C Form 1040 or CEZ Form 1040 if you are in the business of
renting personal property.
Most individuals operate on a cash basis, which means they count their rental income
as income when it is actually received, and deduct their expenses as they are paid.
If you are a cash basis taxpayer you cannot deduct uncollected rents as an expense
because you have not included those rents in income. If a tenant pays you to cancel
a lease, this money is also rental income and is reported in the year you receive
it. Do not include a security deposit in your income if you plan to return it to the
tenant at the end of the lease. If you keep part or all of the security deposit because
the tenant damaged the property or did not live up to the terms of the lease, this
money is taxable income in the year this determination is made. If the security deposit
is to be used as the tenant's final month's rent, you include the money as income
when you receive it, rather than when you apply it to the last month's rent.
Some examples of expenses that may be deducted from your total rental income are
depreciation, repairs, and operating expenses. You can recover some or all of your
original investment in the rental property (including furnishings) and the cost of
later improvements through depreciation. You must use Form 4562 (PDF) (to report depreciation) in the year your rental property is first placed
in service, and in any year you make an improvement or add furnishings. The cost of
repairs may be deducted in full in the year paid. If you personally repair something
on your rental property, you may not deduct the value of your own labor. Only outofpocket
costs, such as materials, are deductible. For a discussion of the difference between
repairs and improvements, refer to Publication 527, Residential Rental Property (Including
Rental of Vacation Homes). Other expenses you may deduct include advertising, fire
and liability insurance, taxes, interest, and commissions paid for the collection
of rent.
If you rent only a part of your property, you must divide the expenses between
the part used for rental purposes and the part used for other purposes. You may use
any reasonable method for dividing the expenses, but a method based on square footage
is usually the most accurate.
There are special rules relating to the rental of real property that you also use
as your main home or your vacation home. For information on income from these rentals,
or from renting at an amount less than the fair market value, refer to Topic 415, Renting
Vacation Property and Renting to Relatives.
If you do not use the rental property as a home and you are renting to make a profit,
your deductible rental expenses can be more than your gross rental income, subject
to certain limits. For information on these limitations, refer to Topic 425, Passive
Activities Losses and Credits.
For more information on rental income and expenses, including passive activity
loss limits, refer to Publication 527.
Source: www.irs.gov
