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December 31st is just around the corner so now is the time to make any last minute purchases or changes to your business if you want them to be included on your 2011 tax return. But tax-time also raises a lot of questions. Many first-time landlords don’t know how much of the money they received from tenants needs to be reported on their tax return or what expenses they can deduct from their rent income.

What Income is Taxable?
Rental Income – The money you collect as rent payments from your tenants is taxable. However, you do not have to pay tax on everything you collect because you are able to deduct expenses for your rental properties from the income. This includes costs to get your property ready to rent and costs to maintain the property as a rental.

Security Deposits – Security deposits are not classified as income when you receive them because they are still the tenant’s money and expected to be repaid if the property is returned in good condition. If the deposit funds are used to pay for repairs this income must be counted, but will be offset by the cost of the repairs.

When Do I Pay Tax on My Rental Income ?
You must report all rental income on the return for the year you actually receive it , even if it should be credited to your tenant for a different year. For example:

• If you receive rent for January 2012 in December 2011, the rent should be reported as income on your 2011 tax return.
• If you receive a deposit for first and last month’s rent, the entire payment is taxed as rental income in the year it’s received.
• If you receive goods or services from your tenant in exchange for rent, you must report the value of the goods or services as rental income on your return for the year in which you receive them.

What Expenses are Deductible?
The expenses you incur while getting your rental property ready, managing it, and maintaining it are usually deductible. Even if your rental property is temporarily vacant, the expenses are still deductible while the property is unoccupied and held out for rent.

Deductible expenses include, but are not limited to; advertising, cleaning and maintenance, depreciation, homeowner association dues and condo fees, insurance premiums, interest expense, property taxes, management fees, professional fees, equipment rentals, repairs, supplies, travel expenses, utilities, and yard maintenance.

All expenses you deduct must be ordinary and necessary, and not extravagant. Travel expenses to your rental property can be deducted if the primary purpose of the trip is to check on the property or perform tasks related to renting the property.

What is Depreciation?
Depreciation is a deduction taken over several years, meaning that although you paid for an item you spread the cost out over its useful life. It’s common to depreciate the cost of business property that has a useful life of more than a year, but gradually wears out, or loses its value due to wear and tear, weather damage, etc.

What’s the Difference Between Repairs and Improvements?
There’s a big difference between how improvements and repairs are handled on your tax return. The cost of property improvements must be capitalized and depreciated over several years (by following IRS depreciation tables) rather than deduct the entire expense in the year paid. Property improvements are actions that materially add to the value of the property or substantially prolong its life, like a kitchen remodel.

By contrast, the cost of repairs can be written off in the year you pay them because repairs are items that keep the rental in good operating condition, such as repairing appliances.

How Do I Report Rental Property Activity on My Tax Return?
If filing as an individual, rental property income and expenses should be reported on Schedule E: Supplemental Income and Loss. The total income or loss computed on Schedule E carries to page 1 of your Form 1040. RentMonitor provides a printable tax report that follows the Schedule E tax categories to make filing your taxes much easier.

The depreciation of rental property should be reported on Form 4562: Depreciation and Amortization. The IRS website, provides complete instructions and detailed explanation for how to complete these forms.

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