If you own rental property, you should be aware of your federal tax obligations. All rental income must be reported on your tax return, and expenses can generally be deducted from your rental income. Here are some tax reporting tips, recordkeeping requirements, and information about rental property deductions.

What is considered Rental Property Income?

You must generally include all rent payments in your gross income. Any payment you receive for the use or occupation of property is referred to as rental income. Rental income for all of your properties must be reported. Apart from regular rent payments, there are other amounts that may be rental income and must be reported on your tax return.

Advance rent is any amount received prior to the period covered. Regardless of the period covered or the method of accounting used, Include advance rent in your rental income in the year you receive it.

Security deposits used as a final payment of rent are considered advance rent. Include it in your income when you receive it. If you intend to return a security deposit to your tenant at the end of the lease, do not include it in your income when you receive it.

Payment for lease cancellation occurs when your tenant pays you to cancel a lease. Rent is the amount you receive. Regardless of your accounting method, include the payment in your income in the year it is received.

Expenses paid by the tenant must also be included in your rental income. For example, your tenant pays your rental property’s water and electricity bills and deducts them from the regular rent payment. Your tenant is not required to pay this bill under the terms of the lease. Include the tenant’s utility bill and any rent payments received in your rental income.

Property or services received as rent rather than money must be included in your rental income as the fair market value of the property or services. For example, suppose your tenant is a painter and offers to paint your rental property in exchange for two months’ rent. If you accept the offer, include the amount the tenant would have paid for two months’ rent in your rental income.