Rental income is any payment received for the use or occupation of property. Generally, you must include in your gross income all amounts you receive as rent. The following types of payments should be included when reporting your income from rental property:
- Advance rent
- Security deposits (depending on lease terms)
- Payment for canceling a lease
- Expenses paid by tenant
- Property or services received
- Rental of property also used as a home
Repairs and expenses related to rental property are generally deductible from your gross rental income in the year you paid or incur the expense. The following is a list of expenses you can deduct:
- Mortgage interest
- Insurance premiums
- Travel expenses
- Local transportation expenses
- Tax return preparation in connection with rental property
- Depreciation of rental property
- Real estate taxes
- Cleaning and maintenance
- Commissions or management fees
Repairs and Improvements
You can deduct the cost of repairs that you make to your rental property. However, you may not deduct the cost of improvements. The cost of improvements is recovered through depreciation.
A repair keeps your property in good operating condition and does not materially add value to the property. Some examples of repairs are painting, fixing leaks and cracks, replacing broken doors or windows, or other parts of the rental property.
An improvement adds to the value of your property, prolongs its useful life, or adapts it to new uses. Examples of improvements are adding a deck, sunroom, gym, community room, fence, or new roof.
Vacant Rental Property and Pre-rental Expenses
You may deduct rental expenses from the time you make the property available for rent. The expenses incurred and paid for ordinary and necessary expenses in connection with managing, conserving, or maintaining the property, while it is vacant, are deductible. However, you can not deduct a loss of rental income during the period in which the property is vacant.For more information, read IRS Pub 527