Rental income is one of the most important parts of real estate. What many landlords may not realize is that there are several ways to make rental income beyond just collecting rent checks.

Rental income comprises more than just direct income from tenants. Here’s what you should know about the different types of rental income and how it is taxed.

What is Rental Income?

Rental income is the payment you receive for the occupation or use of your property. You’ll report rental income for all of your properties. 

There are different rental income types:

  • Advance rent: Any amount you receive before the period that it covers. 
  • Canceling a lease: This is rental income if your tenant pays you to cancel a lease. When you receive the income, you’ll include it in the year received regardless of the accounting method.
  • Expenses a tenant paid (You can deduct the expenses if they’re deductible rental income)
  • Property services: You’ll add the fair market value of the property or service as the rental income amount. 
  • Security deposits: Security deposits used as a final payment of rent are advance rent. You should include this in your income when you receive it. 

There are additional ways that you may earn rental income: 

  • Lease with option to buy: If your rental agreement allows your tenant to buy your rental property, the payments you receive are rental income. 
  • Part interest: If you own a part interest in your rental property, it is rental income.
  • Rental property also used as your home
    • If you rent property also used as your home, and you rent it for less than 15 days, don’t include the rent as income. 
    • You also don’t need to deduct rental expenses. 
    • However, you can include certain deductions, interest, and taxes on Schedule A.

How Do Taxes on Rental Income Work?

You’ll report rental income on: 

If you have more than three rental properties, you’ll complete as many Schedule E forms as you’ll need. 

When Do You Pay Taxes on Rental Income?

The deadline to pay rental income taxes is the same as other taxes. This means you’ll have the same deadlines to submit taxes due for rental income as other taxpayers. 

How to Calculate Rental Income

To determine how much you’ll owe in rental income taxes, you’ll complete Part I, Income or Loss From Rental Real Estate and Royalties, on Schedule E

Calculating rental income consists of a few steps: 

  • First, add rent received throughout the year. This will determine your gross income. 
    • On Schedule E, this is line 3 in the Income Section.
      • Include any money received from other property-related sources. 
      • Include the fair market value of merchandise or services received instead of money. 
      • You shouldn’t include a security deposit if you will return it at the end of a tenant’s lease.
  • Second, add property-related expenses. 
    • On Schedule E, this begins with line 5 of the Expenses section. Property-related expenses include:
      • Advertising
      • Depreciation 
      • Insurance
      • Management 
      • Maintenance
      • Mortgage interest
      • Taxes
    • Other categories to include in the property-related expenses are: 
      • Repairs
      • Supplies
      • Utilities
    • After completing lines 5 to 19 on Schedule E, you’ll add your expenses and fill in line 20.
  • Third, you’ll subtract your total expenses (line 20) from your rent total (line 3) on Schedule E. You’ll enter this number on line 21. 
  • To calculate your rental income (on line 24 of Schedule E), you’ll add the positive amounts on line 21. 
    • You shouldn’t include any losses on this line.
  • Line 26, the total rental real estate and royalty income (or loss), is the result you’ll have after filling out your income, line 24, and your losses, line 25.

There are three potential scenarios with your rental income total: 

  1. If the difference is greater than zero, your rental income will be taxable rental income. 
  2. If the difference is zero, it will not affect your income.
  3. If the difference is less than zero, you don’t have taxable income. 
    • You can deduct this amount lost from other sources, such as your business revenue or your wages.

How to Calculate Rental Income Taxes

Rental income is taxed as regular income. This means you’ll calculate your rental income according to one’s individual tax rate. 

You can also qualify for deductions with rental income taxes, which can decrease the amount you owe. You may be eligible for deductions with: 

  • Depreciation
  • Improvements
  • Ordinary and necessary expenses

Are Security Deposits Taxable Income?

Security deposits can be taxable income, depending on how you use it: 

  • Security deposits aren’t normally taxable income, and state laws may treat this form of income as a trust fund. 
  • Security deposits used as final rent payments are a form of advance rent that is taxable.
  • If you plan to return the security deposit to a tenant at the end of your lease, don’t include security deposits as part of your income.

How Do You Report Rental Activity on a Tax Return?

Your rental activity frequency will determine how you report it on a tax return. You’ll use Schedule E to report expenses and income from real estate. 

If you live in residence for the higher of 14 days or 10 percent of the total days rented to others, you’ll report rental activity on your tax return. 

If you have a loss from rental activity, you may be able to take the loss against other income. 

Finally, there are special rules for minimal rental use. If you use a unit as a residence and you rent it for fewer than 15 days, you: 

  • Don’t deduct any expenses as rental expenses 
  • Don’t report any rental income

Work with the Pros 

Rental income comprises many details, so it’s important to know where to go if you need help. Rather than struggling to sort out your rental income taxes on your own, work with the pros at 1-800Accountant for your real estate tax needs.

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Written by Susan Young

Susan Young is a Tax Accountant and 1-800Accountant Specialist. She's worked with the company for over 5 years and takes pride in helping he...