Tips on Property Management Rental Income, Deductions and Record keeping.

If you own rental real estate, you should be aware of your tax responsibilities.

All rental income must be reported on your tax return, and in general the associated expenses can be deducted from your rental income.

If you are a cash basis taxpayer, you report rental income on your return for the year you receive it, regardless of when it was earned. As a cash basis taxpayer you generally deduct your rental expenses in the year you pay them. If you use an accrual method, you generally report income when you earn it, rather than when you receive it and you deduct your expenses when you incur them, rather than when you pay them. Most individuals use the cash method of accounting.

Below are some tips about tax reporting, recordkeeping requirements and information about deductions for rental property to help you avoid mistakes.

What is Considered Rental Income?

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. You must report rental income for all your properties.

In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income and must be reported on your tax return.

Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. For example, you sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year’s rent and $5,000 as rent for the last year of the lease. You must include $10,000 in your income in the first year.

Security deposits used as a final payment of rent are considered advance rent. Include it in your income when you receive it. Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.

Payment for canceling a lease occurs if your tenant pays you to cancel a lease. The amount you receive is rent. Include the payment in your income in the year you receive it regardless of your method of accounting.

Expenses paid by tenant occur if your tenant pays any of your expenses. You must include them in your rental income. You can deduct the expenses if they are deductible rental expenses. For example, your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill. Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income.

Property or services received, instead of money, as rent, must be included as the fair market value of the property or services in your rental income. For example, your tenant is a painter and offers to paint your rental property instead of paying rent for two months. If you accept the offer, include in your rental income the amount the tenant would have paid for two months worth of rent.

Lease with option to buy occurs if the rental agreement gives your tenant the rights to buy your rental property. The payments you receive under the agreement are generally rental income.

If you own a part interest in rental property, you must report your part of the rental income from the property.