Collecting regular rent checks is certainly one of the perks of being a rental real estate owner. But regardless of how your properties are titled, Uncle Sam is still considered your “business partner” – at least when it comes to your taxable rental income.
According to the IRS, “rental income is any payment you receive for the use or occupation of property.” And it’s important to note that in addition to your regular rent payments that are received from your tenants, there are other amounts that may also be required to be reported on your income tax return.
For example, in some cases, property owners may receive rent payments in advance. So, if a tenant pays $1,000 per month to rent a unit this year, and they also give you $12,000 up-front for all of next year’s rent payments, $24,000 should be reported on your tax return for this year. That is because taxable income is reported in the year it is received – even if the payments are covering a time in the future.
If a tenant cancels their lease and pays you an early termination fee, the amount of this fee is considered income – and thus, it must be reported in the year it is received. In some cases, some or all of a tenant’s security deposit may go towards covering the last month’s rent.
If this is the case, the amount that will not be returned to the tenant is considered an advanced rent payment, and in turn, it must be reported as income. Alternatively, any portion of the security deposit that is intended to be returned to the tenant is not required to be reported on your tax return in the year it is received.
IRS tax rules can oftentimes be complicated. But working with a property manager who also has experience as a CPA can help. If you own residential rental property in Orlando and/or the surrounding Central Florida area, give us a call and find out how we can help.
Tips on Rental Real Estate Income, Deductions and Recordkeeping. Internal Revenue Service.