Tax Topic #414 |
2008 Tax Year |
Topic 414 - Rental Income and Expenses
Generally, cash or the fair market value of property you receive for the
use of real estate or personal property is taxable to you as rental income.
You can generally deduct expenses of renting property from your rental income.
Income and expenses related to real estate rentals are usually reported on Form 1040, Schedule E (PDF). Income and expenses related
to personal property rentals are reported on Form 1040 (PDF).
Most individuals operate on a cash basis, which means they count their
rental income as income when it is actually or constructively received, and
deduct their expenses as they are paid. If you are a cash basis taxpayer,
you cannot deduct uncollected rents as an expense because you have not included
those rents in income. If a tenant pays you to cancel a lease, this money
is also rental income and is reported in the year you receive it. Do not include
a security deposit in your income if you plan to return it to the tenant at
the end of the lease. But if you keep part or all of the security deposit
during any year because the tenant damaged the property or did not live up
to the terms of the lease, this money is taxable income in the year this determination
is made. If the security deposit is to be used as the tenant's final month's
rent, you include the money as income when you receive it, rather than when
you apply it to the last month's rent.
Some examples of expenses that may be deducted from your total rental income
are depreciation, repairs, and operating expenses. You can recover some or
all of your original expenses and improvements by using Form 4562 (PDF) (to report depreciation) beginning in the year your rental property
is first placed in service, and beginning in any year you make an improvement
or add furnishings. For information on depreciation, refer to Publication 946, How To Depreciate Property. Repair costs, such as
materials, are usually deductible. For a discussion of the difference between
repairs and improvements, refer to Publication 527, Residential Rental
Property (Including Rental of Vacation Homes).
There are special rules relating to the rental of real property that you
also use as your main home or your vacation home. For information on income
from these rentals, or from renting at an amount less than the fair market
value, refer to Topic 415, Renting Residential and Vacation Property
(formerly Renting Vacation Property and Renting to Relatives).
If you do not use the rental property as a home and you are renting to
make a profit, your deductible rental expenses can be more than your gross
rental income, subject to certain limits. For information on these limitations,
refer to Topic 425, Passive Activities – Losses and Credits.
For more information on rental income and expenses, including passive activity
loss limits, refer to Publication 527.
Page Last Reviewed or Updated: December 22, 2008
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