Rental Income Basics

The Quails Nest

The Quails Nest, photo by Eric M. Martin

Are you a landlord?  Are you renting property out to someone?  Maybe you were trying to sell a house but the market was too tough so you rented it out to someone.  If so, that makes you a landlord and you’ll need to report your rental income on your tax return.  Here’s some basic information you need to know.

First, the form you need to fill out is called a Schedule E.  You file it with your regular 1040 form.  If you look at the form you’ll see columns A, B, and C.  That’s for people who own more than one property.  If you just own one place that you’re renting out, put everything in column A.  If you own a duplex or a multi unit apartment building, you still put everything in column A.  If you own three separate houses that you’re renting out, then you use a separate column for each property.  If you own 20 properties, you’re going to use 7 of these forms.  (If you own 20 properties, you’re hiring a professional anyway.)  The totals will go in the column on the far right. 

Do not do this by hand.  You’re going to be depreciating the property and unless you really know what you’re doing you’ll mess it up.  Tax software will talk you through it and handle the depreciation and everything.    Do not buy the cheap software.  If you’re buying Turbo Tax, get the Premier package.  If you’re buying H&R Block At Home, you need the Premium Edition.  The cheaper packages are not designed to handle rental real estate issues so don’t even try.

Now that you’ve got the proper software and you’ve got all your information ready, what all do you need to be reporting anyway?

Income:  basically, you’re going to report the income you receive from rents the year in which you receive it.  That means, if someone paid you rent six months in advance, you report all of the rent that you received, even though some of the rent is meant for next year.

Security deposits:  security deposits are not rent.  You don’t report that as income unless you’re going to keep it.  It’s not income when you get it, and it’s not an expense when you refund it to your tenant.

Property or services in lieu of rent:  that’s a little trickier.  Let’s say that you have a tenant in an apartment that rents for $1,000 a month.  You have a tenant who’s particularly handy and she painted the house for you in July in exchange for a month of free rent.  On your Schedule E, you would record the $1000 as rent received, but you would also record the $1000 as an expense to the property.  Generally, whatever price you and your tenant come up with will be considered to be the fair market value of the labor (or property.)

Expenses paid by tenant:  If your tenant pays a bill that normally would be considered your  bill, then you have to count that as income as well.  Say for example that a water main broke and you couldn’t be there to meet the plumber and pay him.  Your tenant (bless her heart) not only met the plumber but also paid the bill.  Because the bill was yours (and not the tenant’s) you must also include that amount as income.  And of course, you’ll be writing off the bill as an expense also.

1099 Rules for Landlords and Small Businesses

1099 Rules for Landlords and Small Businesses


Are you confused about the rules for small businesses and landlords issuing 1099’s for anyone that they’ve paid over $600 to?  Has a company asked you to fill out a W9 form because you or your business is doing some kind of work for them?  It seems like everybody is a bit confused, even the IRS.  But here’s help.


The rules have changed several times since the original post. If you’re preparing 1099s or tax returns for tax year 2016–these are the updated rules.


The  1099 law is actually part of the Affordable Care Act although it has nothing to do with health care.  Is your head spinning yet?  Seriously, the 1099 law states that businesses will be required to issue 1099 forms to contractors that they have paid over $600 to.


So who gets a 1099 MISC?  Basically, if you own a business, or are a landlord, you need to issue a 1099-MISC to anyone  that you’ve paid over $600 to for labor.  So, let’s say you pay a computer programmer to set up your office system – you’d issue a 1099 MISC.  But if you buy a computer for $1000 – then you don’t.  Confused yet?


Okay, here’s another situation – you issue a 1099 MISC to individuals and LLCs, but not to corporations.  So, let’s say Roberg Tax Solutions prepares your business tax return for $800.  Roberg Tax Solutions is an LLC, so you think okay, I’ve got to issue a 1099 – BUT, Roberg Tax Solutions has elected to be taxed as an S Corporation.  Say what?  Now you don’t have to issue me a 1099.  How do you keep track of that?  By looking at the W9.  Make sure all contractors you work with complete a W9 form.  It will tell you if they are a corporation or not.


If you need to prepare 1099s, here’s a link that will give you information on how to do it: How to Prepare a 1099


If you’re a landlord or small business owner you should expect that you will need to file 1099 forms for your contract laborers this year.  Start collecting information from them now so that you’ll be prepared come January.  You’ll need a W9 form, here’s a link:  W9


Print it out and have all of your vendors sign one.  You can be hard-nosed about this too.  No W9, no payment.  It’s that easy.


If a business that you provide a product or service to asks you to complete a W9 form, it is a legitimate request.  If you’re a sole proprietor and don’t have an EIN number, you may want to apply for one so that you’re not giving out your social security number all over the place.  If you’d like more information on EIN numbers, read my other post:  Free EIN


You can get an EIN number directly from the IRS for free.


One question that I’m always asked is, “Is there any way to get out of having to issue a 1099?”  The answer is, “Yes.”  If you pay a vendor with a credit or debit card, you do not have to issue a 1099.  The reason is, when you use a credit card to pay a vendor, the credit card company will be issuing a 1099K statement showing the payment you made.  So, it you want to reduce the 1099s you have to issue, use your credit card more often.