Landlords must be aware of everything that IRS considers as income. Landlords also need to be more knowledgeable about legal deductions so that they do not overpay their taxes.
IRS is reporting that there is a gap between what Landlords are paying in taxes and what should be paid. More then likely, IRS, will be reviewing Schedule E Forms more closely.
Rental Income:
Rental Income is ANY monies received for the use or rental of your rental property.
Rental income may include:
Advance rent payments
Early-termination fees on lease agreements
Expenses paid by tenant for the landlord
Property or services received in lieu of money
Lease payments with option to buy (These payments are usually counted at rental income until the tenant purchases the property)
Note: (IRS Code) Security deposits are not counted as income if they are refunded at the end of a lease period. per an agreement. Any funds withheld from a deposit are counted as income in the year they are retained. Deposits used as final lease payments are considered advance rents and counted as income in the period they are received.
Rental Expenses:
Landlords can deduct expenses for managing and maintaining their rental property.
Ordinary expenses are those that are common and generally accepted in the business.
Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.
Other deductible expenses are:
Expenses incurred from the time a property is made available for rent and is actually rented.
Some or all of the original investment in the rental property may be recovered through depreciation. Subsequent improvements may also be depreciated.
The cost of repairs may also be deductible. This may include the cost of labor and materials.
Note: Landlords cannot deduct the value of their own labor
Improvements that add to the value of a property or prolong its useful life are considered capital expenses and generally must be depreciated. You can learn more about Depreciation in IRS Publication 946.
If you have rental property that you sometimes use for personal use, like a ski home; your expenses will be based upon the number of days the property is rented and/or used for personal use.
If your rental property is vacant, you may deduct the expenses incurred while trying to rent the property as well as the ongoing expenses of the property.
Expenses incurred while property is vacant but available for rent may be deductible. Lost rental income while a property is vacant is not deductible.
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