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Rental Income and Expenses-2013

     Rental Income

Rental income includes any payment received for the use or occupancy of property. In addition to normal rent pay-ments, the following items are reported as rental income.

Types of Rental Income Description
Advance rent Any amount received prior to the period
that the payment covers.
Payment for canceling a Any amount paid by a tenant to cancel
lease a lease.
Expenses paid by tenant* Any amount paid by a tenant on behalf of
the landlord to cover maintenance or im-
provement expenses.
Property or services** The fair market value (FMV) of property
or services received in lieu of rent.
All of these types of rent are reported as income in the year received.

Example: If a furnace in a rental property stops working, and the tenant pays the repair costs and subsequently deducts the amount from rent, the cost of the repair is treated by the landlord as rental income. The landlord would report the amount as income and also report the amount as a rental expense for repairs and maintenance.
Example: If the tenant provides services for the landlord in lieu of rent, the FMV of the services is reported by the landlord as rental income. If the services are provided at an agreed upon price, that price is considered FMV unless there is evidence to the contrary.
Security Deposits

A security deposit is not included in rental income when received if the property owner plans to return it to the tenant at the end of the lease. If any amount is kept during the year because the tenant did not live up to the terms of the lease, include that amount as rental income. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent and is included as income in the year received.


IRS regulations for investment expenses specifically mention commuter’s expenses as being nondeductible, making the same commuting rules that apply to busi-ness expenses also apply to passive rental activities.

Travel Expenses

Expenses for traveling away from home, such as trans-portation and lodging, are deductible if the primary purpose of the trip is to manage, collect rental income, conserve, or maintain the rental property.


Prepaid interest is not deducted when paid. Instead, prepaid interest is deducted in the period to which it applies. Points or loan origination fees paid for rental property are deducted over the life of the loan.

Repairs and Improvements

The cost of repairs to a rental property may be deducted as a current expense. The cost of improvements must be recovered by taking depreciation. Whether an expendi-ture qualifies as a currently deductible repair, or is re-quired to be capitalized, is a factual determination. The taxpayer bears the burden of proof and must have suffi-cient records to substantiate the expense as a deduction instead of a capital expenditure.

Repairs Improvements
Costs that: Costs that:
• Keep the property in good • Add to the value of the property,
operating condition. • Prolong the property’s useful
• Do not materially add value to life, or
the property. • Adapt the property to new uses.
Do not substantially prolong the property’s life.

Deductible as a current expense. Must be capitalized and
Rental Expenses

A deductible expense is any expense that is both:

Ordinary. Common and accepted in the taxpayer’s line of work, and
Necessary. Helpful and appropriate for work.
An expense need not be required in order to be consid-ered necessary. Facts and circumstances must be con-sidered in each case to determine whether an expense is ordinary and necessary.


Depreciation deductions begin when property is ready and available for rent.

Vacant Property

Expenses are deductible beginning at the time the property is available for rent regardless of when rental income is actually received.

Insurance Premiums Paid in Advance

Insurance premiums paid more than 12 months in ad-vance are deducted in the year to which the policy ap-plies. Premiums paid for 12 months or less are deductible in the year paid.

Local Transportation Expenses

Local transportation expenses incurred to collect rent-al income or to manage, conserve, or maintain rental property are deductible. The taxpayer may deduct ei-ther actual expenses or the standard mileage rate for an

Repairs and Improvements continued

Repairs Improvements
Examples: Examples:
• Repainting inside or out. • Room additions.
• Fixing gutters. • Remodeling.
• Fixing damaged carpet. • Landscaping.
• Fixing leaks. • New roof.
• Plastering. • Security system.
• Replacing broken windows. • Replacing gravel driveway with

Example: Ashlyn’s rental property has damage to a small section on one corner of the roof. If she fixes only that small portion of the roof, she can deduct the cost of the repair as a rental expense. However, if she replaces the entire roof, the new roof is an improvement because it increases the value and lengthens the life of the property. She would depreciate the cost of the new roof.

Personal Use of Rental Property-Roommates and Boarders

Renting Part of Property

If a portion of property is rented out, and a portion is used for personal purposes, any reasonable method of allocating expenses between personal and rental use is allowed. For example, dividing the cost of utilities by the number of people living in the home, or dividing ex-penses based on square footage of use, are reasonable methods.

Example: Phil owns and lives in a personal residence that has 1,800 square feet of floor space. Phil takes in a boarder and rents out a room that is 12 × 15 feet, or 180 square feet. Phil can allocate 10% of the home’s expenses to the rental. The total utility bills for the year are $2,700. Phil can deduct $270 ($2,700 × 10%) from rental income.

Phone Expense

The cost of the first phone line into a home that is used for both personal and rental purposes is not deductible.

Article Source:

Manendra (Manen) Kothari, CPA SK Tax Associates, CPAs 127 S. Roselle Rd Ste # 200 Schaumburg,IL 60193 Ph : 847.524.0001 E-Fax : 877.334.0712 Email Web :

Posted on 2012-10-06, By: *

* Click on the author's name to view their profile and articles!!!

Note: The content of this article solely conveys the opinion of its author,

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