Rental income is any payment received for the use or occupation of property. Rental income is generally included in gross income when actually or constructively received. Cash basis taxpayers report income in the year received, regardless of when it was earned. Expenses of renting property can be deducted from gross rental income. Rental expenses are generally deducted by cash basis taxpayers in the year paid.
Advance rent is any amount received before the period that it covers. Include advance rent in rental income in the year received, regardless of the period covered or the accounting method used.
Do not include a security deposit in income when received if it is to be returned to the tenant at the end of the lease. If part or all of the security deposit is retained during any year because the tenant does not live up to the terms of the lease, include the amount retained in income for that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in income when received.
If the tenant pays any expenses that are the landlord’s obligations, the payments are rental income and must be included in income. These expenses may be deducted if they are otherwise deductible rental expenses. Property or services received in lieu of rent are reportable income. Include the fair market value of the property or services in rental income. Services at an agreed upon or specified price are assumed to be at fair market value unless there is evidence to the contrary.
Personal use of a vacation home or other rental property requires that the expenses be allocated between the personal and rental use. If the rental expenses exceed rental income, the rental expenses will be limited.