Rental Income Tax Law

Rental income is reported on Form 1040, Schedule E.

Rental income is considered gross income by the Internal Revenue Service. Rental income includes collected security deposits, which are used as rent payments and are not returned to the tenant.

Benefits

Property owners may deduct the interest portion of the money they borrow to finance the property. Owners can also deduct the fees they paid to help pursue investment income. Owners may deduct fees paid for tax advice, legal real estate advice and the cost of newspaper advertisements used to find prospective tenants.

Size

If the taxpayer's rental property was rented for less than 15 days in one year, then the rental income is not includable as gross income. Property owners are able to deduct the necessary maintenance costs for repairs to damaged or worn items. Home improvements, however, are not deductible, because it benefits the property owner over time. Improvements should be capitalized or depreciated incrementally until the home is no longer used as a rental property or the taxpayer has recouped the complete improvement expenditure.

Effects

Advance rental payments are included as gross income for the year in which the owner receives the payments. The rental income is reported on Form 1040, Part 1 of Schedule E. Owners must keep receipts and canceled checks.

References

• Internal Revenue Service: Publication 527 (2009), Residential Rental Property

Resources

• Internal Revenue Service: Tips on Real Estate Income, Deductions and Recordkeeping