What is Rental Income?  What are the different
types of Rental Income?  We break down the
different types of Rental Income in the examples
examples listed below.

What is Rental Income?



You generally must include in your gross income all amounts you
received as rent.  Rental income is any payment you receive for
the use or occupancy of property.  You must also report income
that you "constructively" receive.  Constructive receipt of income
means that you have the opportunity to receive the income.

Example:  If you rent a house and the tenant pays you for their
January rent with a check in late December, you cannot avoid
reporting it as rental income by not depositing it in your bank until
January.

When to Report Rental Income
If you are a cash based taxpayer, which you will more than likely be,
you are required by the IRS to report rental income on your return
for the year you actually or constructively receive it.  If you use an
accrual method, you report income on your tax return for the year in
which you are entitled to receive payment, even if it's not actually
paid.  An example would be a business that sells a computer on
December 29, 2007 and bills the customer the first week of January
2008, and ultimately receives payment the next month.  Under the
accrual basis, the business would report the amount received in
it's 2007 income.  Accounting methods are outside the scope of this
website so if you would like to learn more you can read IRS
publication 538, Accounting Periods and Methods.

As mentioned earlier, rental income is defined as any payment you
receive for the use of property.  There are other types of "income"
related to the renting of your property.  These include:

Advance rent 
Advance rent is any amount you receive before the period that it
covers.  You need to include advance rent in your rental income in
the year you receive it regardless of the period covered or the
method of accounting used.

Example 1: Mark signs a 10 year lease to rent his property.  In the
first year he receives $5,000 for the first year's rent and $5,000 as
rent for the last year of the lease.  Mark must include $10,000 in his
income for the year. 

Example 2: Mark rents a room to Lori.  He receives a rent check in
December 2007 from Lori for her January 2008 rent.  Mark must
report the rent as income on his 2007 tax return.

Security deposits
You do not need to include a security deposit in your income when
you receive it if you plan to return it to your tenant at the end of the
lease.  If you keep part of the security deposit during any year
because your tenant doesn't live up to the terms of the lease, you
will need to include the amount you keep in your income that year.

If an amount called a "security deposit" is to be used as a final
payment of rent, it is advance rent.  You will need to include it in
your income when you receive it.

Payment for canceling a lease
If your tenant pays you to cancel a lease, the amount you receive is
rent.  You will need to include the payment in your income in the
year you receive it.

Expense paid by tenant
If your tenant pays any of your expenses, the payments are rental
income.  You must include them in your income.  You can deduct
expenses if they are deductible rental expenses. 

If your tenant pays your utility bills or your emergency repairs and
deducts the amount from the rent payment, you must include as
rental income the full rental amount, not the actual net payment. 
You can claim an offsetting deduction for expenses, such as
repairs, that would have been deductible had you paid them.

Example 1: Lance rents out a house to Sean.  While Lance is
vacationing in France the furnace stops working in his rental
property.  Sean pays for the necessary repairs and deducts the
repair bill from his rent payment.  Lance will need to include the rent
payment received from Sean and the amount Sean paid for the
repair in his rental income.  Lance doesn't have to worry though
because he will be able to deduct the cost of the repair as a rental
expense.

Example 2:  Chuck rents a house from Nathan.  He pays the
water and sewage bill for Nathan's rental property and deducts it
from the normal rent payment.  Under the terms of the lease, Chuck
does not have to pay the water and sewage bill.  Nathan will need
to include the utility bill paid by Chuck and any amount received as
a rent payment in his rental income.  Nathan can deduce the utility
payment made by Chuck as a rental expense.

Property or services
If you receive property or services instead of money as rent, you
will need to include the fair market value of the property or services
in your rental income.  If you agree upon a specified price for
services rendered, that price is the fair market value unless there is
evidence to the contrary.

Example: Jody rents out a condo to Nick.  Nick is a painter and
offers to paint the condo instead of paying 2 months rent.  Jody
decides to accept the offer and must include in her rental income
the amount that Nick would have paid for 2 months rent.  Jody can
also deduct that same amount as a rental expense for painting the
property.

Lease with option to buy
If the rental agreement gives the tenant the right to buy your rental
property, the payments you receive under the agreement are
considered rental income.  If your tenant exercises the right to buy
the property, the payments you receive for the period after the date
of sale are considered part of the selling price.

Rental of property also used as a home
If you rent property that you use as your home and you rent it fewer
than 15 days during the tax year, you don't need to include the rent
you receive in your income and you don't have to deduct rental
expenses either.

Click here to learn more about this 15 day exclusion


Part Interest
If you own a part interest in rental property, you must report your part
of the rental income from the property.

Insurance
Insurance proceeds for loss of rental income because of fire or other
casualty are treated as rental income.



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