If you’re a landlord or rental real estate owner, then you must understand rent tax rules imposed by the IRS. Although it can be confusing to know which forms to use and what type of income to report, there are a few tips to keep in mind this tax season.

In this article, you’ll learn about how these areas impact your tax reporting:

• Rent
• Advance Rent
• Security Deposits
• Tenant Expenses
• Services in Place of Rent
• Deductions for Real Estate Owners
• Forms for Rent Tax

Rent Tax for Rental Real Estate Owners 

Rent

If you currently have a property you rent out, then all rental income needs to be reported on your tax return. Keep in mind that if your tenant incurs a cost for canceling their lease, this is also considered income.

Advance Rent

Rental real estate owners are also required to report advance income. Advance income is money that covers rent from a future time period. For example, let’s say a tenant gives you $10,000 for the first year’s rent and another $10,000 for the following year’s rent. Although the rent covers two years, you received the money in one lump sum, which means you need to report an earning of $20,000.

Security Deposits

You may or may not have to report the security deposit from your tenant. If you plan to return the money at the end of the lease, you do NOT need to report this on your tax return. However, if you keep part of the money, then this will count towards your income for the year.

Some landlords use the security deposit as part of the final payment for rent. If this is the case, then this is counted as advance income and, therefore, needs to be reported.

Tenant Expenses

In some situations, your tenant may pay for some things for the rental, like utility bills or home repairs. If these are not part of their normal contract, then they will usually be deducted from their rent payment. Therefore, these payments are also considered income and will need to be reported to the IRS.

Services in Place of Rent

Not all rental contracts are paid for in money. Some landlords receive services as rent instead. For example, perhaps your tenant offers to paint your house or landscape your garden in lieu of paying rent. In these cases, you will still need to report the rental income that they would have paid for since it is a fair swap.

Deductions for Real Estate Owners

Paying income tax also means that your expenses towards the home can also be deducted, resulting in a lower tax burden. It may be helpful to use a financial budgeting tool to keep track of expenses for your home or rental.

You are able to deduct necessary expenses for your rental. This includes:

• interest
• taxes
• advertising
• utilities
• insurance

Homeowners can also deduct costs for maintaining their apartment or home. This includes:

• maintenance
• supplies
• repairs
• materials

Unfortunately, rental owners are not able to deduct expenses associated with improving their homes. This includes:

• restoration
• betterment
• adaptation to a new or different use

Forms for Rent Tax

One of the most confusing parts of paying taxes is knowing which forms to submit to the IRS. If you rent buildings, rooms, or apartments, report your income and expenses on Form 1040 or 1040-SR, Schedule E, Part I.

If you have more than three rental properties, you may need additional Schedule Es (although the total should only be tallied on one Schedule E).

If your expenses exceed income, your loss may be limited. This sometimes happens if you rent out a home you also use for personal use. To determine this, use Form 8582, Passive Activity Loss Limitations, and Form 6198, At-Risk Limitations.

Remember, you don’t have to do your taxes on your own! You can also use an online tool or tax preparation service to help you make sure everything is filed correctly.

Get the Most Out of Your Return

Paying rent tax can be a confusing topic for rental homeowners (or for business owners and investors, too!). But hopefully, these tips can help make sure you get the most from your tax credits and tax return.