More assets means more complex federal income tax returns. If you have rental income, you must report it to the Internal Revenue Service. Rental property income is subject to expense deductions for depreciation, insurance, repairs, maintenance, interest, property taxes and utilities, so not all your rental income is taxable. Complete your tax return by reporting all your income, but keep careful records of expenses for deductions.
Significance
Schedule E for Supplemental Income and Loss is the appropriate form to report rental income unless you are in the business of renting property and providing related services. A business for this purpose requires a Schedule C for Profit or Loss From Business.
Use Schedule E if you rent out a room, an apartment, a vacation home or a building. Report total rental income on Schedule E, and list the deductions for which you have receipts. Include repairs, insurance and taxes.
Income
Work with simple principles of cash accounting. Advance rent is income in the year it is collected, and any portion of a deposit withheld from return is income in the year you withhold it.
If you accept services in lieu of rental payments, you must claim the services as rent. If your tenant deducts utilities or similar expenses from the rent, you must add the full rental price as income and subtract the utilities as expenses.
Expenses
Use Form 4562 for depreciation, especially if this is your first year of rental income. Publication 946 from the IRS will give you information for depreciation. Form 4562 includes car expenses as well.
If you used the rental property for more than 14 days in the tax year or more than 10 percent of the rental time, you must divide your expenses between rental use and personal use. Information on do this is in Publication 527 on Residential Rental Property from the IRS.
Repairs are deductible, but improvements are not. Depreciation covers improvements, or value-added work, on your real property. Repairs do not materially add to the property but maintain the real estate in good operating condition.
Effects
Line 26 is your total rental real estate income or loss. Once you complete Schedule E, transfer the total on Line 26 to Line 41 on Schedule E and to Line 17 of Form 1040 to add into your gross income for taxation.
Result
Complete of IRS Form 1040 just as you have done in previous years. Include the rental figure on Line 17 in your total to arrive at your adjusted gross income. Completion of Schedule E will be part of your tax preparation routine for years if you have rental income. Rely on Publication 527 from the IRS to complete Schedule E each year.
Tags: rental income, rental income, complete Schedule, Form 1040, Form 4562
