Rental income is income, and you must report it on your taxes.
If you collect rent on a property you own, you must report it on your taxes. However, you're allowed to subtract the expenses of owning and maintaining the property from the total amount of rent you receive. If you share ownership in the property with someone else, you report only your proportional share of the income and expenses.
Is It a Business?
How you report your rental income depends on whether your rental property qualifies as a separate business rather than just a source of income. Under Internal Revenue Service rules, if you provide "substantial services" for your tenants' personal convenience beyond simply renting to them, then the rental is a separate business and you must report the income on Schedule C. "Substantial services" include such things as maid service or cooking. They do not include paying utilities, maintaining the property or performing repairs. If your rental property is not a separate business, report the income on Schedule E. Most people who simply rent a room, a house or a plot of land to someone else use Schedule E.
Schedules
If you're using Schedule E, fill out only Part I; the rest of the form is for different kinds of income. Identify each rental property you own and the amount of rent you received from each. Next, deduct your expenses for each property. When you're finished, the form will tell you how much income to report on Line 17 of your tax return, IRS Form 1040. If you're using Schedule C, report the amount of rent you received from all properties in Part I, then deduct your expenses in Part II. When you're finished, the form will tell you how much to report on Line 12 of your 1040. Note that if your rental property qualifies as a business, you must also pay self-employment taxes using Schedule SE.
Income
Rental income includes not only monthly rent payments, but also any money a tenant pays to break a lease, as well as any advance rent payments. It also includes any of your own expenses paid by a tenant. If for some reason a tenant paid your mortgage on the property for a month or paid the utilities even though doing so was your responsibility under the lease, that money is considered rental income. Security deposits may or may not be income. If the deposit is supposed to be returned to the tenants when they move out, then it is not income. But any portion of such a deposit that you keep to pay for damage to the property is income, which you report in the year the tenant moves out and you keep the money. If the deposit is intended to serve as the last month's rent, then it is income, and you report it when you receive it.
Expenses
Common expenses that you can deduct from your rental income on Schedule E or C include the cost of advertising a vacant unit, cleaning of common areas, maintenance, repairs, taxes, insurance, mortgage interest on the property, supplies and utilities. You can also deduct depreciation of the property itself. If you or your family used the property during the past year, the amounts you can deduct for expenses may be limited. See the instructions for "Personal Use of Dwelling Unit" in IRS Publication 527.
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