How to File a Tax Return for a Rental Property
If you are the owner of rental real estate, it is important to understand your federal tax obligations. It is crucial to report all rental income on your tax return, and typically, you can deduct the associated expenses from your rental income.
What Qualifies as Rental Income?
All payments received as rent must generally be included in your total income. Rental income encompasses any payment you receive for the use or occupancy of a property. It is important to report rental income for all properties you own. Apart from regular rent payments, there are other types of payments that may qualify as rental income and should be reported on your tax return.
Advance rent refers to any amount received before the period it covers. Include advance rent in your rental income for the year you received it, regardless of the period covered or your chosen accounting method. For instance, if you sign a 10-year lease for your property and receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease in the first year, you must report $10,000 as income for that year.
Security deposits used as the final payment of rent are treated as advance rent. Include it in your income when you receive it. However, if you plan to return the security deposit to your tenant at the end of the lease, you don't need to include it in your income when you receive it. But if you retain part or all of the security deposit during any year due to your tenant's failure to comply with the lease terms, include the amount retained in your income for that year.
Payments received for canceling a lease occur when your tenant pays you to terminate a lease. The payment you receive is considered rent and should be included in your income for the year you receive it, regardless of your accounting method.
If your tenant pays any of your expenses, those payments should be included in your rental income. You can deduct these expenses if they are eligible rental expenses. For example, if your tenant pays the water and sewage bill for your rental property and deducts it from the regular rent payment, include the amount of the utility bill paid by the tenant and any rent received in your rental income.
What Expenses Can I Deduct as a Rental Property Owner?
How to Report Rental Income and Expenses
When it comes to renting out real estate, such as buildings, rooms, or apartments, reporting your rental income and expenses is typically done using Form 1040 or 1040-SR, Schedule E, Part I. On the appropriate line of Schedule E, you should list the total income, expenses, and depreciation for each rental property. To determine the amount of depreciation to enter on line 18, refer to the Instructions for Form 4562. Similarly, use the Instructions for Form 4562 to determine the amount of depreciation to enter on Form 1040 or 1040-SR, Schedule E, line 18.
If you own more than three rental properties, you need to complete and attach as many Schedule E forms as necessary to list all the properties. Fill out lines 1 and 2 for each property, including the street address of each property. However, only complete the "Totals" column on one Schedule E. The figures in the "Totals" column on that particular Schedule E should represent the combined totals of all the Schedule E forms.
In situations where your rental expenses exceed your rental income, there may be limitations on the amount of loss you can deduct. The deductibility of your loss may be restricted by the passive activity loss rules and the at-risk rules. To determine if your loss is subject to limitations, refer to Form 8582, Passive Activity Loss Limitations, and Form 6198, At-Risk Limitations.