Rental Income Basics

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.