So you’ve decided to rent property to others in hopes of generating income. Well, whether the property is residential or commercial property being rented, certain considerations for income and expenses exist. Keeping track of all income and expenses for each rental property that the taxpayer owns is an important step in the process, the most important being the acquisition of the property itself. As a general rule any expense necessary to produce the income is deductible. Below we attempt to list income and expenses to be included when figuring the income or loss on the rental property to provide some guidance.

• Rental income is defined as payments received for use or occupancy of the property in question and includes the following sources:
• Rent payments collected
• Advance Rent payments
• Payment for lease cancellation
• Expenses paid for by tenant in lieu of rent
• Property or services at fair market value (what the property or service would be worth if money changed hands)

Security deposits aren’t included in income unless the tenant doesn’t live up to their end of the rental (lease) agreement. Then only the portion that is not returned to them is included in income. Deposits that are for the last months rent are considered advanced rent and are to be included in income.

As with rental income, some rules apply with expenses. Rental expenses follow the same basic rules of other business expenses and are deductible when the property is available for rent regardless of income. Receipts should be kept. One such expense is travel. Travel expenses are allowed if the purpose is to collect rent, manage, conserve or maintain the property. This includes the mileage required to get to and from the rental property.  Rents that aren't collectible can’t be deducted as bad debt since most rental activity is on a cash basis. While improvements are considered expenses they are capitalized and depreciated over the remaining life of the property since they serve to either replace a part of the property or to increase the value of the property. Improvements as opposed to repairs include such things as replacing a sidewalk, roof or furnace. We have provided a list (which can be used as checklist) at the end of this article of examples of expenses that are deductible to help you better track expenses related to your rental property.

One last thing to consider is that if you are renting to a relative your expenses will be limited to the amount of rent collected unless certain circumstances are met. The reasoning behind this is that the property is considered for personal use even though it is a rental property. Expenses are not limited if rents are received at fair market value (amount you could receive if renting to an outside party), or the relative is expected to take exceptional care of the property so that management fees aren’t incurred.

• Deductible Expenses include:
• Maintenance Expense (this includes the expenses paid by the tenant(s) that were included in income)
• Advertising
• Property Taxes paid
• Mortgage interest
• Points paid on loan (amortized over the life of the loan)
• Depreciation
• Repairs (not improvements)
• Insurance
• Legal and professional fees (this includes accounting fees)
• Management fees
• Labor
• Cleaning
• Utilities (you paid in direct relation to the rental property)
• Commissions
• Supplies
• Auto and Travel expenses (as discussed above)
• Office Supplies to the extent that they are used to track income and expenses of the rental property

If you have questions concerning this or other tax matters please contact one of our tax professionals.