If you own a property that you rent out to tenants, you may wonder if you have to report the rental income to the IRS, especially if you are not making any profit from it. The answer is yes, you do have to report your rental income regardless of whether it is profitable or not. However, you may also be able to deduct some of your rental expenses and reduce your taxable income.
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What is rental income?
Rental income is any payment you receive for the use of your property or personal property. It includes:
- Rent payments
- Advance rent
- Security deposits (if you keep them)
- Expenses paid by tenants
- Property or services received in lieu of rent
You must report your rental income on Schedule E (Form 1040), Supplemental Income and Loss, unless you provide substantial services to your tenants, such as cleaning, maintenance, or meals. In that case, you must report your income and expenses on Schedule C (Form 1040), Profit or Loss From Business.
You must report your rental income in the year you receive it, not when it is earned. For example, if you receive a rent payment in December 2023 for January 2024, you must report it as income in 2023.
What are rental expenses?
Rental expenses are the costs you incur to maintain, manage, and operate your rental property. They include:
- Mortgage interest
- Property taxes
- Depreciation
- Repairs and maintenance
- Utilities
- Insurance
- Advertising
- Legal and professional fees
- Travel expenses
- Home office expenses
You can deduct your rental expenses from your rental income to calculate your net rental income or loss. You can deduct your rental expenses in the year you pay them, not when they are incurred.
However, there are some limitations on deducting rental expenses. First, you can only deduct rental expenses for the part of the property that is rented out. For example, if you rent out a room in your house, you can only deduct a portion of your mortgage interest and property taxes based on the percentage of the house that is rented.
Second, you can only deduct rental expenses up to the amount of your rental income. If your rental expenses exceed your rental income, you have a rental loss. You cannot deduct a rental loss or carry it forward to the next year.
There is an exception to this rule if you actively participate in your rental activity and your adjusted gross income (AGI) is below a certain threshold. In that case, you may be able to deduct up to $25,000 of your rental loss against your other income. This exception is phased out for AGIs between $100,000 and $150,000.
Third, if you rent out your property for less than fair market value or not for profit, you cannot deduct any rental expenses that are more than your rental income. For example, if you rent out your property to a family member at a low rate, you cannot claim a loss on the property. You can only deduct mortgage interest and property taxes as itemized deductions on Schedule A (Form 1040).
How do you report my rental income and expenses?
To report your rental income and expenses, you need to fill out Schedule E (Form 1040) and attach it to your tax return. You need to list each property separately and report the income and expenses for each one. You also need to allocate your expenses between personal use and rental use if you use the property for both purposes.
You also need to fill out Form 4562, Depreciation and Amortization, if you claim depreciation on your property or make improvements or add furnishings. Depreciation is a way of recovering the cost of your property over time by deducting a portion of it each year. You can use various methods and conventions to calculate depreciation depending on the type and use of your property.
You may also need to file other forms or schedules depending on your situation. For example, if you have foreign rental income or expenses, you may need to file Form 1116, Foreign Tax Credit, or Form 2555, Foreign Earned Income. If you have passive activity losses or credits from your rental activity, you may need to file Form 8582, Passive Activity Loss Limitations, or Form 8582-CR, Passive Activity Credit Limitations.
Why should you report my rental income and expenses?
Reporting your rental income and expenses is not only required by law, but also beneficial for you as a taxpayer. By reporting your rental income and expenses accurately, you can:
- Avoid penalties and interest for underreporting or omitting income
- Claim deductions and credits that can lower your tax liability
- Establish a record of your rental activity and income for future reference
- Support your income and expenses in case of an audit or dispute
If you need help with reporting your rental income and expenses, you can use a tax software program or consult a tax professional. They can guide you through the process and ensure that you comply with the tax rules and regulations.
