Rental Income - IRS Reporting
There are specific IRS reporting rules taxpayers must abide by when they receive rental income during a tax year. Failure to properly report rental income can lead to tax problems.
The taxpayer must generally include in gross income all amounts received as rent during the year. The following are special situations related to payments received by a cash-basis taxpayer from a tenant:
-
Advance rent – Included in the year received regardless of the period covered.
-
Security deposits – Generally not included in income where the landlord plans to return it at the end of the lease. Any amount of the deposit later retained by the landlord becomes income.
-
Expenses paid by tenant – If the tenant pays any of the landlord’s expenses, the payments are rental income., The expenses can be deducted or capitalized under the normal rules.
-
Lease with option to buy - If the rental agreement gives the tenant the right to buy the rental property, the payments received under the agreement are generally rental income until the tenant exercises the option to buy the property. Payments received after the date of sale are considered part of the selling price.