Understanding rental income tax laws are crucial if you’re a landlord or property investor. Misinformation can lead to financial hardship or a failed tax return.
Some different types of rent payments qualify as rental income. These include periodic rent payments, advance rent payments, security deposits that aren’t returned to tenants, and lease cancellation fees.
Rent Payments
Rent payments are a major source of income for landlords. These payments are used to pay for expenses relating to the rental property and any maintenance or repairs required.
So do you pay taxes on rental income? The tax laws on rental income can be complicated, so it’s important to understand how they work.
Landlords can accept various methods for paying rent, including cashier’s checks, bank drafts, and certified checks. These methods are secure and allow for a clear record of payment each month.
Another option is money orders. These can be used to make monthly or yearly payments and are often secured by issuers who will charge tenants a fee for this service.
Security Deposits
A security deposit is a set amount of money you pay a landlord before moving into a rental property. It’s like insurance for the manager/owner to protect their investment against damage caused by you, your family, or pets.
The security deposit amount varies by state and the property you rent. Other factors, such as your credit score, rental application (employment history, criminal records, landlord verification), and local market rates, also play a role.
Most states have laws that regulate the amounts of security deposits and how they are applied. For instance, if you break your lease in some way or you owe back rent, the landlord can make deductions from your security deposit.
First and Last Month’s Rent
The first and last month’s rent are two important factors to consider when renting a property. Understanding how collecting these fees can impact your tax situation, and your bottom line is essential.
The IRS says that when you collect advance rent from your tenant, it’s considered rental income for the year it’s received, regardless of when it’s used. You must also include the money a tenant pays to rescind their lease on your return for the year they received it. This can be a valuable income source for landlords who have to deal with tenants who suddenly need to move out at the end of their lease. However, it’s important to know that these payments are subject to federal income tax. Landlords should consult a tax professional to ensure they’re reporting these amounts correctly.
Goods and Services
Goods and services are the backbones of any traditional economy. Whether they’re tangible goods or intangible services, they’re essential to society.
Consumers buy goods as a means of improving their lives. They might pay for a car, clothes, food, or even a vacation.
Similarly, consumers pay for services such as maintenance and repairs of their homes or cars. They might also pay a mechanic to change a tire or install a new part in their vehicle.
Generally, goods and services are taxable, just like money. In some situations, though, there are tax-free exceptions. For example, if you rent out your beach house for 14 days or less per year, you won’t have to pay any rental income taxes on the profits. Likewise, if you sell your property within 14 days of renting it out, the profit is considered to be made on a personal residence and won’t be taxable.
