If you own investment property that’s rented, you’re approaching a familiar time of year when you must gather receipts for expenses and income to prepare an end-of-year statement for the IRS.
You’ll find a comprehensive outline of how to complete a submission under “Topic 414” on the IRS website, but as an experienced agent who sells a lot of property to investors, I always recommend that my investor clients use professional accounting services to prepare and submit their paperwork.
You want to make sure you claim everything that you’re owed while not over-reaching and getting on the wrong side of the IRS. No one wants that!
Your guiding principle should be that any revenue, including cash, received in relation to any investment property is rental income and subject to tax. Any associated expenses, such as management fees or maintenance, are deductible.
If you’re considering property investing, or would find a refresher helpful, below is a general overview on the items you may be able to claim.
Rental Income
Many landlords operate on a cash or money-transfer basis, which means the income is counted when you actually receive it instead of it being promised or owed. The same principle applies to your expenses. You should be aware that rental income also includes:
- Amounts paid to cancel a lease – If a tenant pays you to cancel a lease, this money is rental income. You must report it.
- Advance rent – Generally, these payments are included in the tax year you receive them.
- Expenses paid by a tenant – If your tenant paid for a plumber in lieu of a favor or other arrangement, the expense is deemed to be taxable income. This expense can then be deducted. Don’t pretend the work and payment never happened.
- Security deposits – These are not included as income as they may be returned to a tenant at the end of a lease. If a tenant leaves and you keep all or a portion of that security, you must declare it as income. It will be offset by the maintenance expenses you incurred that justified not returning the security deposit in full.
Rental expenses
Any wear and tear on the property will likely fall under the claimable category of depreciation. You may also claim operating expenses and repair costs. A Depreciation and Amortization plan (Form 4562) should be in place for each rental property, and this will also aid you in obtaining deductions. If you don’t have a plan, see an accountant immediately and put one in place.
This article is provided for general information only and does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.