Rental Property Basics: Income and Expenses
Owning and leasing property requires good organizational skills, a willingness to keep accurate records, and the ability to keep track of every penny of income and expense.
The IRS defines income and expense very clearly. Familiarity with the rules and regulations will help you organize your financial records and make sound decisions.
Rental income includes the following:
Advance Rent Paid: simply, any amount of money paid prior to the period it covers.
Cancellation Fees: if a tenant pays you money to cancel a lease, the funds are considered rental income.
Expenses Paid by Tenant: this category might include utility payments deducted from the rent payment or a repair bill paid by the tenant, either by mutual agreement or because of an emergency.
Services Provided by Tenant in Lieu of Rent: If your tenant installs a new dishwasher in exchange for a rent reduction, the amount must be reported as rental income. You can also deduct the same amount as an expense.
Retained Security Deposits: Any deposits you accept and intend to return at the end of a lease would not qualify as income. However, all deposits you keep during the year are included as rental income.
Any expense of renting your property can be deducted from your income. Rental expenses include the following:
Advertising Expense: including newspaper ads, signs, and paid website listings. The cost of producing and maintaining your rental business website also qualifies as an advertising expense.
Depreciation: Rental Property owners can begin to deduct depreciation when the property is ready to rent: after purchase and any needed rehab or repairs are completed.
Maintenance: Whether paid to a handyman, contractor, or maintenance firm, these expenses are deductible.
Repairs and Improvements: A long list of improvements are tax-deductible.
Insurance: Includes liability, theft, fire, flood, and any other standard property insurance.
Taxes and Interest: Landlords may deduct certain tax and interest payments.
Utilities: If you pay the utilities on your property/ies, these payments are deductible expenses.
Professional Fees: including tax prep, legal fees, consulting, and other professional services.
Travel Expenses: Expenses incurred while traveling to your rental properties to collect rent or manage the property are deductible, but travel related to improving the property is not. (Cost of improvements is recovered through depreciation.)
Note: The information presented here is not intended to be used as tax advice. Consult your tax professional for details on IRS regulations. It is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.