Taxes on Rental Property Income

It has been said that there are two certainties in life: death and taxes. If you have any form of income above $600, then you are going to have taxes on rental property income to file. When you rent out a property and have tenants, the taxes that you face can be a real headache. Rental income is taxable, but that doesn't necessarily mean that everything you get in monetary payments from a tenant is taxable. For the most part, you have to report all income that you receive during the year. This is true even if you are being paid rent that is past due from the year before. If your tenant is three months behind on rent and pays on January 1, the income gets claimed for the next year instead of the previous year. Here are some other unusual taxes on rental property income to consider so that your tax return this season is as accurate as possible.

Did You Take a Deposit for the First and Last Month's Rent?

If you accepted a payment at the start of a lease for the first and last month's rent, then this is considered taxable rental income. It actually isn't a deposit. It's a future payment. In accounting terms, you are giving your tenant a credit for income received. A deposit is money that your tenant can get back in clearly defined ways - like in a security deposit. This money is considered taxed as rental income in the year it is received.

Did You Take Goods or Services in Exchange for Rent?

Any time you receive rental income, no matter what kind of form it takes, it must be reported for taxing purposes. If you agreed to have a tenant landscape your property in exchange for rent, then you must report the value of that landscaping as income. The value is then taxed just as if you had received cash from your tenant.

Are You Holding a Security Deposit?

If you have money from a security deposit and are holding it for your tenant, then this is not considered income for you. If you have the security deposit in a bank account and are collecting interest on it, then the interest would be considered income that you would need to report. In addition, any costs that are taken out of the security deposit to repair your rental property are not deductions that you can take. It is the tenant's money, it means it is their deduction to take.

Did You Pocket Money From the Security Deposit?

If you took cash and put it in your pocket from the security deposit as compensation for damage, but didn't fix the damage, then you have income that needs to be reported. If the entire security deposit was forfeited and you used a portion of that deposit to make repairs, only the amount that was not used is then considered income. The key term here is “forfeited.” When the deposit is forfeited, the money is no longer the tenant's money. They can deduct the entire expense of the deposit on their taxes. You can then deduct any expenses you have to repair your property out of that money. The taxes on rental income property can sometimes be quite complicated. Use this information to your advantage so that your income can be reported as accurately as possible in the next tax season.

Posted on Nov 24, 2014


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