Landlord’s Guide To Paying Taxes For Rental Income Property

Posted on: July 4, 2011

Categories: Property Management, Things To Consider

Author: lbuen

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Rental Income Property Taxes Image by alancleaver_2000 via Flickr

Give To The IRS What is Due To The IRS – Paying Taxes for Your Rental Income Property

Letting go of 25 to 35 percent of your income to tax is often a painful but compulsory thing to do. You would think of the things you could have bought with the said amount: renovate your multi-door apartment, go on a family vacation, finance another investment, or whatever it is that you want to spend on. However, the tough reality remains that we have to pay the IRS their share but there are many ways to minimize that tax burden. Check back soon for info on how to minimize your rental income tax burden.  So to deal with reality, let us abide by the law and file our income taxes so that our friends from the IRS will not haunt us. If you are a landlord, here are some tips in filing your income tax for your rental income property.

Points To Consider When Paying For Rental Income Property

What To Include in Filing Tax. As a general rule, any amount that you have received as rent or as payment for the use or occupation of property should be included in filing for taxes.

When To Report Income. A cash basis taxpayer is someone who declares income gained from rental income property on the year that he actually or constructively received it, irrespective of when it was gained. Income is received constructively when it becomes obtainable to you, such as when it has already been wired to your bank account.

When To Report An Advance Rent. Any amount that you have received before the period of use or occupancy of the property has arrived is considered advance rent. However, you count it in your rental account on the year you received it without consideration of the period it encompasses or the accounting method that your business employs. For instance, let’s say that you inked a contract for a 5-year lease to rent out your property. In the initial year, your tenant pays you $1,000 as rent for year one, and another $1,000 as rent for year five. The last payment is considered as advance payment, and thus, must be reported on the year that you have received it, which is year one, and not on the year that it covers, which is year five.

Should You Report Security Deposits? Any amount paid to you as security deposit that you plan to reimburse to your tenant at the close of the lease must not be counted in as part of rental income. However, in the event that your tenant breaches contract during any year, you are entitled to keep possession of part or all of it. When this happens, you must include that particular amount in your income in that year. Sometimes a security deposit is employed as final rental; in this case, it is considered as advance rent, and thus, must be counted in as part of your rental income on the year that you receive it.

Should You Count in Rental Payments in Kind? Yes you must, using the fair market value of the property or services used as form of payment in your rental income. You can use as fair market value the agreed or specified price of the services, except if there is proof that it is otherwise. Let’s say that you accept a proposal from your tenant, who happens to be a plumber, that he do the necessary plumbing job in your rental property for a month in exchange for a month of rent. When reporting your rental income for filing taxes, add that one-month rental to your rental income, and add that same amount as maintenance expense for plumbing job for your rental property.

It is every landlord’s obligation to pay taxes for the income he earns from his rental income property, whether from monthly rental payments, advance payments, and other possible forms of income related to the property. You should, thus, get to know what are to be included and when they must be included.

 Landlord’s Guide To Paying Taxes For Rental Income Property
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