This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Generally, each year you will report all income and deduct all out-of-pocket expenses in full. The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2.
If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5.
Generally, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. taxmap/pubs/p527-001.htm#en_us_publink100027235
When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Most individual taxpayers use the cash method.taxmap/pubs/p527-001.htm#en_us_publink100027236
You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account. taxmap/pubs/p527-001.htm#en_us_publink100027237
If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. You generally deduct your expenses when you incur them, rather than when you pay them.taxmap/pubs/p527-001.htm#en_us_publink100069578
See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting.taxmap/pubs/p527-001.htm#en_us_publink100027238
The following are common types of rental income.taxmap/pubs/p527-001.htm#en_us_publink100027239
Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. taxmap/pubs/p527-001.htm#en_us_publink100027240
On March 18, 2008, you signed a 10-year lease to rent your property. During 2008, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. You must include $19,200 in your rental income in the first year.taxmap/pubs/p527-001.htm#en_us_publink100027242
If your tenant pays you to cancel a lease, the amount you receive is rent. Include the payment in your income in the year you receive it regardless of your method of accounting. taxmap/pubs/p527-001.htm#en_us_publink100027243
If your tenant pays any of your rental expenses, those payments are rental income. Because you are including this amount in income, you can also deduct the expenses if they are deductible rental expenses. For more information, see Rental Expenses beginning on this page. taxmap/pubs/p527-001.htm#en_us_publink100027244
Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill. Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the utility payment made by your tenant as a rental expense.taxmap/pubs/p527-001.htm#en_us_publink100027245
While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the repair payment made by your tenant as a rental expense.taxmap/pubs/p527-001.htm#en_us_publink100027246
If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income.
If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. taxmap/pubs/p527-001.htm#en_us_publink100027247
Your tenant is a house painter. He offers to paint your rental property instead of paying 2 months' rent. You accept his offer.
Include in your rental income the amount the tenant would have paid for 2 months' rent. You can deduct that same amount as a rental expense for painting your property.taxmap/pubs/p527-001.htm#en_us_publink100027241
Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.taxmap/pubs/p527-001.htm#en_us_publink100027248taxmap/pubs/p527-001.htm#en_us_publink100027249
If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. taxmap/pubs/p527-001.htm#en_us_publink100027251
If you own a part interest in rental property, report your percentage of the rental income from the property. taxmap/pubs/p527-001.htm#en_us_publink100027250
If you rent property that you also use as your home and you rent it fewer than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. See the paragraph below for another way to deduct real estate taxes in 2008. Also, see chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). taxmap/pubs/p527-001.htm#en_us_publink100071089
If you are not able to itemize deductions on your 2008 tax return, you may be able to deduct all or part of the real estate tax you paid on property held for personal use. Take the deduction (limited to $500 ($1,000 if married filing jointly)) on Form 1040, line 40. See the Form 1040 instructions for line 39c.