Rental Income & Expense

Owning rental property is often a good way to grow your net worth. As the property increases in value, you are collecting rent or other money that usually covers the cost of the mortgage and repairs while allowing you to own the property with little or no out-of-pocket expense. Rental income is generally reported on Schedule E and attached to your Form 1040.

Rental income and expenses

Rental income is any payment received for the use or occupation of property. Generally, you must include in your gross income all amounts you receive as rent. The following types of payments should be included when reporting your income from rental property:

advance rent
security deposits (depending on lease terms)
payment for canceling a lease
expenses paid by tenant
property or services received
rental of property also used as a home

Repairs and expenses related to rental property are generally deductible from your gross rental income in the year you pay or incur the expense. The following is a list of some expenses you can deduct:

mortgage interest
advertising
utilities
insurance premiums
travel expenses
local transportation expenses
tax return preparation in connection with rental property
depreciation of rental property
real estate taxes
cleaning and maintenance
repairs
supplies
commissions or management fees

Repairs and Improvements

You can deduct the cost of repairs that you make to your rental property. However, you may not deduct the cost of improvements. The cost of improvements is recovered through depreciation.

A repair keeps your property in good operating condition and does not materially add value to the property. Some examples of repairs are painting, fixing leaks and cracks, replacing broken doors or windows, or other parts of the rental property.
An improvement adds to the value of your property, prolongs its useful life, or adapts it to new uses. Examples of improvements are adding a deck, sunroom, gym, community room, fence, or new roof.

Vacant Rental Property and Pre-rental Expenses

You may deduct rental expenses from the time you make the property available for rent. The expenses incurred and paid for ordinary and necessary expenses in connection with managing, conserving, or maintaining the property, while it is vacant, are deductible. However, you can not deduct a loss of rental income during the period in which the property is vacant.