Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 7

Rental Income and Expenses

A taxpayer who owns property and rents it out generally must report rental income. Expenses related to the property may be fully or partially deductible against rental income.

Special rules apply to rentals of property used for personal purposes, such as vacation homes. The time the property is used, along with other factors, dictates the tax treatment for reporting rental income and expenses.

Converting a personal residence to a rental property requires that the taxpayer begin depreciating the property. Converting a rental property to a principal residence requires that a taxpayer stop depreciating the property when the property is taken out of service. Special rules apply to calculate allowable depreciation in the year the property is converted.

Passive activity rules and at-risk limitations can prevent a taxpayer from deducting rental losses against ordinary income.

Rental Income

Rental income is any payment received for the use or occupancy of property. Payment in addition to the usual rent checks may also be treated as rental income. Rental payments are included in a cash-basis taxpayer's income when actually or constructively received. Thus, a rent check is income when received, regardless of when the taxpayer deposits it in a bank account or cashes it.

DEFINITION: A security deposit is an amount left with the landlord to cover damage ...