- 1). Take a look at your rental real estate income and become informed of your available federal tax deductions. All of your income from your real estate rentals will have to be reported to the government on your tax forms. Rental income is any payment received for the use of your property and includes advance rent payments received in the year you received it. This does include security deposits if they are used as a final deposit of rent but do not include the security deposits if you plan to return them to your tenant at a later date.
- 2). Include any expenses that are deductible rental expenses on your tax form as rental income. These would include such as your tenant paying water or sewage fees and that being deducted from the total rent due. It may also include a utility bill if you deduct that from the rent due. If your tenant does labor on the property that you accept as payment toward the rent, that can be included as rental income also. All of the associated expenses can be used as deductions from the rental income. You will need to turn in the rental income for the year that it was received in.
- 3). When deciding to use the accrual method of reporting your tax liability, this rental income is generally reported when you earn it and not when you receive it so you need to be aware of that difference. The cash method of accounting is used most frequently by taxpaying citizens. Be sure to include rental income from any lease to own properties also as this also is considered rental income.
- 4). Deductions that can be taken on your tax form could possibly include mortgage interest, taxes on the properties, repairs made and any maintenance costs. You can also deduct depreciation and necessary expenses such as advertising for rentals and insurance. You can deduct repairs made by the tenant also. Improvements on the rental properties cannot be deducted even though it adds value to the property. Additions such as decks or fences is an improvement but this can be added to your depreciation total instead.
- 5). Keep good records and save all receipts for any changes made to your rental properties for these will be needed by the IRS when you file your tax forms. Keeping good records is very important and should be a priority on your list for these must backup your tax claims and deductions if they are requested as in an audit at any time by the IRS. The IRS offers many helpful publications that have a lot of tips and information and a link to their website is included at the foot of this article.
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