Real Estate & Taxes:
Rental income is generally any kind of payment your client receives for use of her real estate or personal property. This money is taxable rental income. Expenses related to this real estate and the rental income that your client received for it are reported on E form 1040 (supplemental income or loss). Expenses related to personal property rental and the income from it are reported on C or C-EZ form 1040. You report your client's rental income for the year she received it. This means if someone stays at your client'shome for 15 days this year and doesn't pay her for it until next year, you do not have to report it this year.
Following are some examples of how to handle different situations with rental income:
- Your client signs a lease with a client to rent a small store to him. He pays your client $12,000 for the first year's rent and $12,000 for the last year in which the lease ends. In this tax year, your client must include $24,000 as her rental income. For the IRS, the money your client has in her pocket at the moment is what she is taxed on. It does not matter that it is money paid in advance of ten years. As long as your client has already received it, you must report it for this year.
- Any amount received for canceling of a lease is considered to be rental income.
- Expenses paid by a tenant for any kind of repairs to your client's property are considered to be rental income.
- Security deposits are not considered rental income if your client plans to return the money at the end of the lease term. If for any reason the tenant does not live up to his lease terms for a particular year and your client decides to keep the security deposit, you must report the deposit as rental income for that year. If the tenant plans to use his security deposit as rent for the last month of the lease, this is advance rent so you report it in the year that your client receives it.
- If your client's tenant decides to pay her with property or services instead of money as rent, you have to report the fair market value of these services and property as her rental income.
- If a property is rented for fewer then 15 days a year and your client also uses this property for a home, you do not need to include the rent you receive for these days as rental income.
- If your client has partners in a rental property, you must include her share of the interest from the property as her rental income.