You generally must include in your gross income all amounts you
receive as rent. Rental income is any payment you receive for the use
or occupation of property. In addition to amounts you receive as
normal rent payments, there are other amounts, discussed later, that
may be rental income.
When to report.
Report rental income on your return for the year you actually or
constructively receive it, if you are a cash basis taxpayer. You are a
cash basis taxpayer if you report income in the year you receive it,
regardless of when it was earned. You constructively receive income
when it is made available to you, for example, by being credited to
your bank account.
For more information about when you constructively receive income,
see Publication 538,
Accounting Periods and Methods.
Advance rent is any amount you receive before the period that it
covers. Include advance rent in your rental income in the year you
receive it regardless of the period covered or the method of
accounting you use.
You sign a 10-year lease to rent your property. In the first year,
you receive $5,000 for the first year's rent and $5,000 as rent for
the last year of the lease. You must include $10,000 in your income in
the first year.
Do not include a security
deposit in your income when you receive it if you plan to return it to
your tenant at the end of the lease. But if you keep part or all of
the security deposit during any year because your tenant does not live
up to the terms of the lease, include the amount you keep in your
income in that year.
If an amount called a security deposit is to be used as a final
payment of rent, it is advance rent. Include it in your income when
you receive it.
Payment for canceling a lease.
If your tenant pays you to cancel a lease, the amount you receive
is rent. Include the payment in your income in the year you receive it
regardless of your method of accounting.
Expenses paid by tenant.
If your tenant pays any of your expenses, the payments are rental
income. You must include them in your income. You can deduct the
expenses if they are deductible rental expenses. See Rental
Expenses, later, for more information.
Your tenant pays the water and sewage bill for your rental property
and deducts it from the normal rent payment. Under the terms of the
lease, your tenant does not have to pay this bill.
While you are out of town, the furnace in your rental property
stops working. Your tenant pays for the necessary repairs and deducts
the repair bill from the rent payment.
Based on the facts in each example, include in your rental income
both the net amount of the rent payment and the amount the tenant paid
for the utility bills and the repairs. You can deduct the cost of the
utility bills and repairs as a rental expense.
Property or services.
If you receive property or services, instead of money, as rent,
include the fair market value of the property or services in your
If the services are provided at an agreed upon or specified price,
that price is the fair market value unless there is evidence to the
Your tenant is a painter. He offers to paint your rental property
instead of paying 2 months' rent. You accept his offer.
Include in your rental income the amount the tenant would have paid
for 2 months' rent. You can include that same amount as a rental
expense for painting your property.
Lease with option to buy.
If the rental agreement gives the tenant the right to buy your
rental property, the payments you receive under the agreement are
generally rental income. If your tenant exercises the right to buy the
property, the payments you receive for the period after the date of
sale are part of the selling price.
Rental of property also used as a home.
If you rent property that you also use as your home and you rent it
for fewer than 15 days during the tax year, do not include the rent
you receive in your gross income. You cannot deduct rental expenses.
However, you can include on Schedule A (Form 1040) the interest,
taxes, and casualty and theft losses that are allowed for nonrental
property. See Personal Use of Vacation Home or Dwelling Unit,
If you own a part interest in rental property, you must report your
part of the rental income from the property.
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