Last week we covered the general rules around reporting rental Real Estate activities on tax returns. This week we’ll begin to dive into more specific issues related to income tax reporting for Real Estate Investors, by covering the reporting of income on rentals. Today, we’ll cover income related to the lease itself, primarily the monthly payments from the tenant/leasee to the landlord/leasor. In a future segment, we’ll cover sales of real estate.
Most of the taxpayers who come into our Richardson tax office are individual taxpayers who use the cash basis of tax reporting. This makes it fairly simple. Income is reported when it is received by the owner of the real estate. Rental income is reported when received or constructively received. The IRS in Publication 538 describes constructive receipt as: “an amount [that] is credited to your account or made available to you without restriction.” Typically, where this come up in the normal daily life of a landlord would be the following example: The tenant makes their payment for January of the following year and gives it to the landlord for deposit in December of the current year. Even if the landlord does not deposit the funds until the following year, they had constructive receipt in the current year and should report income in the current year.
Here are the answers to some of the common questions that we get related to Schedule E income:
- Late Fees are Reported as Rental Income.
- Lease Cancellation Costs are considered rent and recorded in the year received.
- Advance payments such as the example above (payments for rent in a future year) are reported in the year received.
- When rents are shorted due to expenses paid by the tenant, the full amount of rent income is reported and the amount shorted to reimburse the tenant is reported as an expense to the proper expense category.
- Security deposits are not income. However, if the full amount or a partial amount of the security deposit is not returned, report the amount not returned to the tenant as income.
Be careful to differentiate between amounts collected for security deposits vs. last month’s rent since they are handled differently. While you may run into other issues, these tend to be the most common questions we get related to Schedule E and the rent of real estate.
Do you Need Help?
If you would like help from a firm that specializes in working with realtors and real estate investors, as well as specialize in helping those who have IRS problems, please give us a call at (972) 821-1991.