As you gear up for the 2023 tax season, it’s helpful to know how to report your rental income to the IRS, especially if you’re a first-time landlord. You might be wondering, what counts as rental income? Which tax form should I use as a landlord? What exceptions exist? Here are some details to consider.
Rental Income
The IRS requires you to declare your rental income annually. If you own part of a property, you’ll report the portion of rental income you receive based on your percentage of ownership. Rental income includes several different categories: regular rental payments, advanced rental payments, lease cancellation payments, expenses paid by tenants, fair market value of any property or services received instead of rent, and sometimes security deposits.
Security deposits might be rental income; it depends on how you handle them. If you plan to return the deposit upon lease completion, it doesn’t count as rental income. If you plan to use the deposit as the last month’s rent, however, it’s technically considered advanced rent instead of a security deposit, and you should count it as rental income. Additionally, a security deposit is considered rental income if you keep some or all of the deposit when a tenant doesn’t keep the terms of the rental agreement, so be sure to report any portion of a security deposit you keep.
It’s also important to understand how to treat expenses covered by your tenant. These expenses are considered rental income if your tenant is not required by the lease to pay them. For example, if your tenant pays the gas bill for you and subtracts that amount from his or her rental payment, you must count the money paid toward the gas bill as rental income.
Related: Best Way to Collect Rent: Cash vs Online Payments
Tax Form
You will almost always report your income on Schedule E of Form 1040. You can use one Schedule E form for up to three properties at a time. If you have more than three properties, you’ll need to attach additional Schedule E forms as necessary to report all your properties. However, you should only fill out the “Totals” column on one of the Schedule E forms. This column will contain the total of all the Schedule E forms you use.
One exception to Schedule E is Schedule C. Landlords rarely use Schedule C, and it’s unlikely you’ll use it. However, you might use Schedule C to report your rental income if you provide “substantial services” for your tenant’s convenience. This means you go above and beyond typical services and provide hotel-like services, such as changing linens, cleaning regularly, or providing meals. This definition does not include cleaning public areas, collecting trash, providing security, and the like. Be very cautious before you decide to use Schedule C—the likelihood of being audited while using this schedule for reporting rental income is high. Be sure to consult a tax professional before you do.
Related: How to Fill Out Taxes Right: Schedule E Tax Form, Categorize Documents, Store Information
It’s important for you to keep supporting evidence for every last tax detail you report on these forms. If the IRS audits you and you have everything accessible, you’ll be able to easily explain why you reported the numbers you did. Using software to keep track of every last detail is well worth it especially if you’re audited. It proves the numbers you report and reduces the tax preparation burden on you. Landlord software like TenantCloud offers a tax reporting format that can display your rental details on Schedule E, making life easier for you.
Related: 1040 Tax Form: A Beginner’s Guide to Filing Your Taxes
Conclusion
Taxes can be tricky, and it is important to get them right, especially if errors from one year can cascade into other years. If you don’t feel confident doing taxes yourself, there are many resources for you, including tax professionals and software. However you decide to approach your taxes, be sure to keep great records, and you can feel confident you have proof to back up any tax claims you’ve made.
Sources:
- https://www.irs.gov/taxtopics/tc414
- https://www.irs.gov/publications/p925
- https://bcocpa.com/rules-rentals-reported-schedule-business/
- https://www.irs.gov/instructions/i1040se
- https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping#:~:text=Rental%20income%20is%20any%20payment,reported%20on%20your%20tax%20return.
- https://tfx.tax/landlords/articles/schedule-c-vs-schedule-e-for-rental-property.html
- https://thecollegeinvestor.com/32445/what-is-schedule-e/
- https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping#:~:text=Rental%20income%20is%20any%20payment,reported%20on%20your%20tax%20return.
- https://www.irs.gov/forms-pubs/about-form-1040-sr#:~:text=Form%201040%2DSR%20is%20available,instructions%20as%20Form%201040%20does.
- https://www.irs.gov/newsroom/know-the-tax-facts-about-renting-out-residential-property#:~:text=In%20most%20cases%2C%20a%20taxpayer,it%20may%20not%20be%20allowed.
- https://www.hrblock.com/tax-center/wp-content/uploads/2018/05/airbnb-taxes.pdf
