Reporting Residential Rental Income for 2004
The mere thought of the impending tax season can give most people heartburn; and if you are a new rental property owner or are considering buying rental property there are a few tax basics and resources that will put you on the right path.

Residential rentals are real properties, such as houses or apartment complexes, rented primarily for use as dwelling units and are considered rental property. You don’t have to own a large apartment complex to be considered a rental property owner. Even if you rent a single home or a portion of your primary dwelling you must report that income to the IRS. All income received from a rental property is taxable and should be reported on your tax returns. Security deposits are not considered income if you intend to return the deposit upon termination of the lease. If some of the security deposit is kept to compensate for a tenant not fulfilling the terms of a lease, then that money is reported in the year the lease is terminated.

Goods and services exchanged with a tenant for rent are also taxable at their present value in the year they are received and must also be reported to the IRS.

Expenses incurred maintaining and managing a property may be deductible. These expenses include maintenance and management costs incurred while the property is vacant. Other expenses which are considered deductible are:

• Mortgage interest
• Property taxes
• Property insurance
• Maintenance
• Homeowner’s association dues
• Commissions
• Advertising
• Repairs
• Travel expenses
• Utilities

Improvements, defined as actions that add material value or substantially prolong the life of the property, can be deducted as well, but must be depreciated over their useful lives (defined by the IRS), rather than deducted in the year they were paid&sub1;. These examples include swimming pools, structural additions or the installation of a water filtration system. For more clarification on what sort of activities are considered improvements see IRS Topic 414 – Rental Income and Expenses.

Depreciation is another possible deduction and allows for compensation of value lost on the home due to normal wear and tear. The value that is depreciated must be figured using only the value of the property that applies to the rental structure itself (i.e. the value of the land cannot be figured into the amount of depreciation).

Claiming depreciation has implications down the road when the property is sold – the property is subject to a taxable gain from recaptured depreciation as well as other capital gains taxes. Depreciation is explained more in-depth in the instruction for IRS Form 4562 Depreciation and Amortization.

According to tax law, rental properties are by definition passive activities and are subject to passive activity loss rules which limit your ability to utilize your passive losses as deductions against other types of income such as wages or interest. Specific rules and limitations on passive activity rules are provided by the IRS in the instructions for Form 8582 Passive Activity Loss Limitations.

You must actively participate in the management of your rental property to claim deductions against other types of income. To be considered an active participant you must be at least a 10% owner of the property and take part in management decisions such as approving repairs or outlining the terms of the lease. Acting as an active participant allows you to claim up to $25,000 of loss. People with an income of more than $100,000 are an exception to this rule and may not be able to deduct their losses from their other income whether filing single or married filing jointly.

IRS Publication 527 - Residential Rental Property covers rental income and expenses in-depth and how they should be reported when filing taxes for 2004. This document is comprehensive and what is lacks in plot twists and character development it makes up for by providing detailed guidelines on filing properly.

Income and deductions for rental property income are reported on page 1 of IRS Form 1040, Schedule E and carries to form 1040 (Instructions for filing).

1. FAQs on Taxes & Rental Property, http://www.turbotax.com/articles/FAQonTaxesandRentalProperty.html

This entry was posted on Monday, January 3rd, 2005 at 1:30 am and is tagged . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.