Taxes on your Rental Property

Now that the 2018 tax season is here, it is important to attempt to avoid any undesirable tax consequences that can occur on income claimed on rental property. It is important to know that if you are in the business of renting out a property, you must pay taxes on the income you receive from it. The owner renting out the property is required by law to report their rental income on their taxes.

Types of rental income can include: normal rent payments, advance rent payments, payments for cancelling a lease, and/or expenses paid by the tenant. There are exceptions to what may be included as rental income, such as short lease periods. If a property owner rents out a property for a period of 15 days, or less, the owner is not required to report the income. In cases of this short rental period the owner also does not have to deduct rental expenses for that period.

Another exception to what may be included as rental income is a security deposit. Security deposits are not included as taxable rental income. It is typically understood that a security deposit will be returned to the tenant upon the completion of the lease. In an instance in which the owner keeps all or part of the security deposit due to a tenant’s failure to meet the terms of the lease, the owner must include this amount in the rental income amount.

There are several expenses which are deductible to an owner. Ordinary and necessary expenses for managing and keeping up with the rental property can be deducted. Ordinary expenses are common expenses that incur from operating expenses. Necessary expenses include taxes, advertising, maintenance, utilities, and insurance. As far as things that owners cannot deduct, those typically include modifications to the property. Costs for improvements such as restoring or changing the use of the property are not deductible.

To avoid any potentially undesirable tax consequences it is important that owners clarify the use of their property. If an owner is using their rental for personal and rental use it is important to divide the expenses. Expenses from the rental use are taxable; expenses from personal use are not.