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Fact Sheet on Rental Income and Expenses

November 12, 2021 

As the owner of rental real property, it is important to understand what income should be reported on the tax return and what tax deductions are available.


Rental Income

  • Expenses paid by the tenant on behalf of the landlord are considered rental income. The landlord may also deduct these expenses as rental expenses.

  • Property or services received in forms other than money are treated as rental income based on their fair market value.

  • Amount withheld from the security deposit is considered rental income in the year it is retained. However, if the deposit is to be returned to the tenant at the end of the lease term, it is not considered rental income.

  • Advance rent received from a tenant must generally be reported as rental income in the year it is received, regardless of the period covered or the accounting method used.

  • Amount received from the tenant for lease cancellation should be included as rental income to the landlord in the year it is received, regardless of the accounting method used.

  • If the tenant has an option to purchase the rental property, payments received under the agreement are considered rental income. When the tenant exercises his/her right to purchase, the payments received after the sale date will be treated as part of the selling price.


Rental Expenses

  • Common types of rental expenses include advertising, auto and maintenance, commissions, depreciation, insurance, interest, legal and other professional fees, local transportation expenses, management fees, mortgage and interest paid to bank, points, rental payments, repairs, taxes, and utilities.

  • The cost of repairs, including the cost of labor and materials, is deductible, but landlords can’t.

  • If any improvement added to the property increase the value of the property or extend its useful life, the cost of these improvements is not deductible and must be depreciated over time.

  • Rental property owners can use depreciation to deduct the costs of purchasing and improving a rental property. Generally, a residential property has a useful life of 27.5 years, and the depreciation period for a commercial property is 39 years. Certain parts of the building can be depreciated separately over 5 years, 7 years, or 15 years. For more information on cost segregation of real property, please refer to our July newsletter.

  • If the rental property is used for multiple purposes and is rented for less than 15 days during the tax year, the rent received is not required to be included as income; Expenses related to the rental activity are also not deductible. If the rental is for more than 14 days during the tax year, deductible expenses must be calculated based on the number of days the property is used for each purpose.