The IRS defines rental property as a single-family home, flat, condominium, mobile home, holiday home or similar dwelling. Any net income from your rental property is taxable as ordinary income on your tax return. Generally, you must include in your gross income any amounts you receive from rent. Rental income is any payment you receive for the use or occupancy of property.
You must report rental income from all of your property. Yes, rental income is taxable, but that does not mean that everything you collect from your tenants is taxable. You are allowed to reduce your rental income by subtracting the expenses you incur to prepare your property for rental, and then to maintain it as a rental property. To calculate income tax, add up all the rents you have received.
Include your property expenses. You should also include the fair market value of any goods or services you have received. If you plan to return security deposits at the end of the lease, do not include that amount in your gross income total. You can deduct the costs of certain materials, supplies, repairs and maintenance you perform on your rental property to keep it in good working order.
The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or booming. The appraisal will examine the rental price of similar properties in your area to come up with a projected rental value. Fannie Mae provides worksheets so you can get an idea of what your rental income may be before you take your paperwork to a lender. Wall Street firms buying distressed properties are aiming for a 5% to 7% return because, among other expenses, they need to pay staff.
How your rental income will be calculated when you try to obtain a mortgage will depend on the documentation used to support it. You can recover some or all of your improvements by using form 4562 to declare depreciation from the year your rental property is first placed in service, and from any year in which you make an improvement or add furnishings. Now that we have defined rental income, it is important to mention that you do not have to pay tax on all the rental income you collect. That's why many successful property investors use Stessa's free software to simplify rental property finances and automate the tracking of income and expenses.
To report rental income, investors must file Form 1040 along with Schedule E documents. Amid new tax policies, changing news cycles and common misconceptions regarding rental income taxation, it is easy to get confused. If you are a cash basis taxpayer, you report rental income on your return for the year it is received, regardless of when it was earned. As with any investment, rental property is not going to produce a big monthly check right away, and choosing the wrong property could be a catastrophic mistake.
If you receive rental income from a rental property, there are certain rental expenses you can deduct on your tax return. To learn more about taxable rental income, be sure to consult a tax professional or information provided by the IRS. All rental income must be reported on your tax return and, in general, the associated expenses can be deducted from your rental income.