The Basics of Income Reports for a Rental Property

In submitting a rental income report, there are things you must consider carefully so that your business won’t have to suffer legal repercussions in case trouble comes. In general, all the amounts you receive from your tenants as payments for the use of your property are considered rental income, therefore must be included to your total income of the year. However, sometimes there are payments that have to be separated, depending on how they are being paid by the renter, so that you can claim them as a deduction on your tax return. To give you more ideas about these aspects, Jaxon Texas is presenting this information. If you use the method of accounting that is based on the “cash basis method”, this will help you understand more about rental income reports and taxes.

The process on filing income reports for tax returns

In filing an income report, rental property owners must use “Form 1040”. On it, “Schedule E: Supplemental Income and Loss” should also be attached. You can do this by declaring all the total income, expenses, and depreciation for property. In the expenses, you may include insurance, maintenance or renovation, advertising, travel, taxes, etc. While in filing for depreciation expense, you have to use “Form 4562”. To have more specific information, we suggest you inquire about the local real estate departments where the property is located. But if you think the amount of time and energy need to complete all these processes is overwhelming, the smartest thing for you to do is hire our company Jaxon Texas.

Method of accounting

It is important to keep all the records of your property management, including financial statements, rent cheques, and other deductible expenditures. These should be used as basis to avoid additional penalties and ensure tax deductions for your property. Private citizens that own a rental property use the cash basis method; meaning a landlord must consider rent money as income for the relevant year. For example, if a tenant signs a two-year contract but he/she paid an amount that includes the following year, all those payments should be reported as rental income for the same year you received them in your tax return.

Types of rental income

There are different types of rental income. These are security deposits, advance rent, monthly rent, tenant expenses, payment for cancellation, and even services. Security deposit is also advance rent but if you are going to return it to the tenant after the contract ended, you don’t need to include this on your income report. However, when a tenant breaks the lease agreement and fails to pay the entire amount charged on their occupation, you can keep this and include it in the income report. Advance rent, on the other hand, is a prepaid amount your tenant pays, generally more than 30 days in advance. When making a report, this should be automatically included and considered as income.

Monthly rent and tenant expenses

Monthly rent, as the name suggests, is the actual amount being charged by landlords every month for the unit or for whole property being occupied by tenants. Property owners charge this amount based on different factors related to expenses and features such as amenities, extra services, and sometimes including monthly utilities. Obviously, this should be automatically included in your income report. Meanwhile, tenant expenses are amounts spent by renters for any payment related to your rental property, including utility bills and even repairs and renovations, as these are not agreed upon in the lease. In filing a tax return, these expenses should be converted into rental income.       

What about property or services as payment?

Landlords may also accept property or services as an alternative to money for the rent. Like for example, a tenant can give their car or any material property that has a valid value to the landlord if they cannot pay their debt in cash. However, the particular deal may vary, depending on the agreement between the landlord and the tenant. Services from the tenant can also be considered if the landlord agrees with them. So instead of paying money, tenants can offer services such as construction or renovation works tantamount to the months they have to pay. When a landlord accepts this, it should also be included in the rental income report. Lastly, in some situations, the tenants cancel the lease. If this happens, tenants must pay an amount required. Therefore the amount a landlord must receive should also be counted as income, regardless of what accounting method is being used.