How to Figure Rental Property Income into Your Taxes
How to Figure Rental Property Income into Your Taxes
Taxpayers who own rental property want to make sure this income is properly reflected on their taxes. Failing to report this income properly can result in unanticipated penalties and interest. In addition to figuring the rental income, you should also consider any associated expenses. Since rental property is considered to be a business venture, your expenses can be written off. Tax laws in general are favorable towards landlords. Programs like TurboTax and H&R Block At Home both offer tools that make your taxes easier to do.
Good Record Keeping Is Vital
It's important to keep good records of your transactions and expenses associated with your rentals. You'll need to have records of the amount paid for the house regardless of whether you paid cash or whether it was mortgaged. Make sure you know the annual depreciation amount of your home. This will be necessary to figure out what your accumulated depreciation is. Always write out receipts when your tenant pays you, even if they pay by check. This also applies to any deposits paid to you. If you reimburse tenants for their security deposit when they move, this will be counted as an expense.
Keep Track of Expenses
In order to properly report gains and losses, you need to have a record of legitimate expenses. Your mortgage interest, if the property has a mortgage, and the property taxes are a consideration. Don't forget the homeowner's insurance either. Be sure to record payments for utilities not paid by the tenant, homeowner's association fees, and fees paid to realtors to manage the property, if applicable. Your repair costs will also be an important consideration. While there are limits to the amount you can report, you'll want to have a record of any and all repairs.
Calculating Your Costs
Most rental properties initially generate at least a small profit. Due to depreciation, these profits easily turn into losses. It's also helpful to remember that your losses due to major repairs will be limited. As of 2010, this loss was limited to $25,000 for all properties. The Schedule E instructions provide more detailed information about these losses and how they affect you. When possible, accounting software should be used to ensure accuracy. Mistakes on your tax return will only cause delays and may result in an audit.
Some Considerations If You Decide to Sell
The way of calculating the gain or loss from the sale of a rental property is different from expenses associated with selling a residence. It has more similarities to reporting the gain or loss from investment accounts. You'll need to figure your cost basis first to get an accurate figure. This is determined by adding your purchase price, improvements and selling costs. The accumulated depreciation is then subtracted from this amount. Subtract the cost basis from your selling price. Positive numbers result in a profit, while negative numbers result in a loss. You'll need to use Schedule D to report any capital gains. Form 4797 is used to report the sale itself.
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