Rental property owners must keep detailed records of their income and expenses when renting to guests. This should include amounts paid for rent and any expenses that could affect your tax liability. Understanding all your tax obligations with a rental property can be complex but also rewarding. If you need assistance managing your tax liability as a rental property owner, you should consult with an experienced Sacramento and Roseville tax lawyer.
The NewPoint Law Group is dedicated to helping you navigate the intricate tax requirements of California and the federal government. We understand the tax issues that rental property owners must face, and we will help you get the most from your tax return. To schedule a confidential legal consultation to discuss your tax situation, call the NewPoint Law Group at 1-800 358-0305.
How to Calculate Rental Income
The Internal Revenue Service (IRS) has multiple definitions for what can be considered rental income. This means it is a good practice to include all rental payments in your gross income. It is important to note that if you have multiple rental properties, you must report your income from each property. The following is a list of income payments that must be factored into your rental income.
Advance Rent Payments
Outside of money received for typical rent payments, there are other forms of rental income that must be documented on your tax return. For example, if you receive a rent payment in advance, this must be included in your rental income. Advance rent payments are added to your income when they are received; they cannot be applied to the period they are intended to cover. This means that if a tenant pays you $10,000 to rent your property in the following year, that money will be applied to your current year income.
Security Deposit Payments
Security deposits that are utilized as a final rent payment do not have to be included in your income if you plan to return the deposit to your tenant. However, if you retain even a portion of the security deposit because the tenant broke certain terms of the lease, this must be included in your income that year.
Canceled Lease Payments
If the terms of your lease agreement include a provision that requires payment for cancellation of the lease, as most leases do, the money you receive for cancellation is considered rental income. A canceled lease payment must be added to your income in the year that it is received.
Expenses Paid by Your Tenant
If your tenant is responsible for paying bills like gas and sewage services, this may be included in your rental income. If the tenant deducts these expenses from their rent payment, you must include the amount paid for utilities as income.
Services Exchanged for Payment
If you accept service or property in lieu of a rent payment, this must be included in your rental income. For example, if your tenant is a contractor and offers to repave your driveway in exchange for dropping two months of rent payments, this is considered income. You must calculate how much the tenant would have paid for two months of rent and add it to your rental income.
There are other forms of rental income not included in this list. To learn more about calculating rental income, you should speak with an experienced California rental property attorney.
Rental Property Tax Deductions
There are multiple tax deductions that a rental property owner can claim. One deduction that may be claimed is for ordinary and necessary expenses. For example, if you are traveling to your rental property to check on its condition, you may be able to claim a deduction. Other ordinary and necessary expenses include, but are not limited to:
- Advertising of your property
- Property maintenance
- Insurance coverage
- Property taxes
- Depreciation of the property
- Pest control
One deduction that you cannot claim is money used to improve the property. The IRS defines an improvement as money used to renovate, restore, or adapt the property for a different purpose. It is also important to note that you must report rental income and expenses by using Form 1040, Schedule E, Part I. Maintaining accurate records is necessary to report your income and avoid missing out on a valuable deduction.
Our California Real Estate Attorneys are Ready to Work with You
There are various regulations that rental property owners must keep track of and our California real estate attorneys are here to help you with that process. At the NewPoint Law Group, our tax attorneys possess decades of combined legal experience that they will utilize to provide you with the service that you deserve. We will help you determine your tax liability and create a tax strategy that works for your unique situation. To schedule a confidential legal consultation, call the NewPoint Law Group at 1-800 358-0305.