For taxpayers who own residential property, renting is often an additional source of income. If you are looking to maximize your refund, it is important to understand the different types of rental income and tax deductions available to property owners. Let’s review the following types of income and tax deductions you should be aware of as a rental property owner.
Types of Rental Income to Report
Advanced Rent Payments – Normal rent payments, like those made monthly, must be reported, of course. But say, for example, a tenant sends you an advance rent payment before they physically occupy a room in your house. You will consider that amount part of your rental income the year the payment was received.
Non-Refundable Security Deposits – Security deposits may also be included as income, but only if the security deposit does not go back to the tenant when the lease ends.
Cancellation Fee – If you receive money from the tenant for a canceled lease, you must include that as part of your income because it is considered rent.
Property Expenses Paid by Tenant – If your tenant pays some or all expenses associated with your property, this is considered income, and you must report it on your tax return. Keep in mind these expenses may also be deductible rental expenses.
Tenant Services – A tenant’s payment may come in the form of service. For instance, if the tenant is a landscaper and you and your tenant arrange that your tenant will do landscaping in lieu of paying rent for three months, you would still include the three months’ rent in your income.
8 Tax Deductions You Should Consider
If you’re the owner of a rental property, here are some of the deductions you might be eligible to take on your tax return:
- Mortgage Interest Deduction – This deduction allows homeowners to deduct the interest on up to $750,000 of qualified residence loans.
Learn more: Understanding the Mortgage Interest Deduction
- Property tax – The IRS allows you to deduct up to $10,000 for state and local taxes (SALT), which can include what you pay for real property. For properties with shared ownership, the amount of property tax you pay or can deduct will depend on if ownership is a Joint Tenancy Agreement or a Tenancy in Common Agreement.
Learn more: Property Taxes 101 – Shared Ownership Properties
- Insurance – You can deduct the premiums you pay for coverage related to your rental. That includes landlord liability, theft, fire, flood, and more.
- Depreciation – In most cases, you won’t be able to write off the total cost of a rental property the first year you purchased it, but you can depreciate your asset and deduct the expense over time.
- Repairs – Replacing carpet, repainting, fixing the roof, etc. Keep all receipts for your repairs and deduct those costs from your taxable income when you file.
Learn more: The Best Way to Organize Receipts and Records for Tax Time
- Home office – Do you operate your rental activity out of a designated space in your home? You may be able to deduct $5 for every square foot of home office space you use.
Learn more: Did Tax Reform Change the Deductions for Your Home Office?
- Professional and legal services – If you pay a lawyer, accountant, or other professional to do work specifically related to your rental, those fees are considered operating expenses and can be deducted on your return.
- Pass-through tax deduction – The Tax Cuts and Jobs Act allows pass-through business owners to deduct up to 20% of their qualified business income on their federal income tax return.
Do you rent your space on Airbnb? Read also: The Complete Tax Guide for Airbnb, HomeAway, VRBO rentals
This article was last updated on October 26, 2022.