Tax tips on rental real estate income and tax deductions for 2017 tax year
Are you owning a rental real estate property and unsure which expenses are deductible? Here’s a general summary :
Income to report
- Rental income: In general, report all income that you earned on your rental real estate property.
- Advance rent: As per IRS guidelines, all advance rent received is also required to be reported. Eg: You received $6,000 i.e $3,000 for the first year rent and $3,000 for the second year. Then both need to be reported at the time you received the $6,000.
- Security Deposit: If you received a security deposit as part of your final payment of rent, it is considered as advance rent. You are required to report the deposit if your tenant did not live up to the terms of the lease and you kept the security deposit as part of this final settlement. You are not required to report if it was not used in lieu of your rent payment.
- Fair market value of services: If you received services instead of cash/check etc, then include the fair market value of the service. Eg: Your tenant is a plumber and he offers free repairs in lieu of one month rent. You are required to estimate the cost of his services and report this as rent.
- Rental expenses deducted at source against rental income: Rental property owners frequently come across this scenario. Your tenant has paid for plumbing expenses of $500, your rental income is $1,000 but he will be paying you only $500. As per the IRS guidelines, you are required to report $1,000 as rental income, $500 as expense netting to $500.
Expenses & tax deduction that you are eligible and required to report
Eligible expenses :
You should report expenses that are :
- Ordinary
- Necessary for the general upkeep of your rental property.
Examples of ordinary expenses are repairs, supplies, materials, maintenance, utilities, advertising, travel expenses incurred while managing the repair work etc.
Improvements to your rental real estate property
Adding a room or extending living space is considered as an improvement to your rental real estate. There are specific rules relating to capitalization and are listed on a separate tax code Section 263 (a). Please check with your tax professional for more information.