Generally, cash or the fair market value of
property you receive for the use of real estate or personal property is tax=
able
to you as rental income. You can generally deduct expenses of renting prope=
rty
from your rental income.
Most individuals operate on a cash basis, which
means they count their rental income as income when it is actually or
constructively received, and deduct their expenses as they are paid. If you=
are
a cash basis taxpayer, you cannot deduct uncollected rents as an expense
because you have not included those rents in income. If a tenant pays you to
cancel a lease, this money is also rental income and is reported in the year
you receive it.
However, you should not include a security depo=
sit
in your income if you plan to return it to the tenant at the end of the lea=
se.
But if you keep part or all of the security deposit during any year because=
the
tenant damaged the property or did not live up to the terms of the lease, t=
his
money is taxable income in the year this determination is made. If the secu=
rity
deposit is to be used as the tenant's final month's rent, you include the m=
oney
as income when you receive it, rather than when you apply it to the last
month's rent.
Some examples of expenses that may be deducted =
from
your total rental income are depreciation, repairs, and operating expenses.=
You
can recover some or all of your original investment in the rental property
(including furnishings) and the cost of later improvements through
depreciation.
The cost of repairs may be deducted in full in =
the
year paid. If you personally repair something on your rental property, you =
may
not deduct the value of your own labor. Only out-of-pocket repair costs, su=
ch
as materials, are deductible.
Other rental expenses you may deduct include
advertising, fire and liability insurance, taxes, interest, and commissions
paid for the collection of rent.
If you rent only a part of your property, you m=
ust
divide the expenses between the part used for rental purposes and the part =
used
for other purposes. You may use any reasonable method for dividing the
expenses, but a method based on square footage is usually the most accurate=
.
There are special rules relating to the rental =
of
real property that you also use as your main home or your vacation home.
If you do not use the rental property as a home=
and
you are renting to make a profit, your deductible rental expenses can be mo=
re
than your gross rental income, subject to certain limits.