I have noticed that there seems to be some confusion as to what constitutes the reportable annual rental income that should be listed in the Gross Rents box on forms 1099 and 1042-S. The purpose of this article is to help all property managers and landlords have a clear understanding of the tax rules that apply to this box.
The following are common types of income:
Advance rent is any amount you receive before the period it covers. Include the advance rent in rental income in the year received, regardless of the period covered or the accounting method you use.
Example On May 15, 2011, you signed a 2-year lease to rent a property. The tenant decides to prepay the entire lease. You receive $ 10,000 for the first year rent and $ 10,000 for the second year rent. The total of $ 20,000 must be reported on Form 1099 in 2011.
Cancel a lease
If the tenant pays to cancel a lease, this payment is reported as income. Include the amount on the 1099 form in the year it is received.
Expenses paid by the tenant
If the tenant pays any of your rental expenses, the amount paid must be included in the gross rent and you will also deduct the expense.
Example: If the oven in the rental property stops working and the tenant pays for the necessary repairs and deducts the amount from the rent payment. The amount paid by the tenant would be included in the rental income and the repair would be deducted as an expense.
Property or Services
If you receive property or services as rent instead of money, include the fair market value of the property or services as rental income in the year you received them.
Example: the tenant is a house painter. Offer to paint your rental property in lieu of paying two months’ rent. Include in rental income the amount you would have paid for rent and deduct the same amount as an expense. Security Deposits – This is the area where I see the most confusion. Please do not include a security deposit in rental income when you receive it if you plan to return the deposit to the tenant at the end of the lease. If you keep part or all of a security deposit during the year because your tenant does not meet the terms of the lease, include the amount you keep in your rental income for the year. If an amount called a security deposit is to be used as the final rental payment, it is an advance rent and must be included in rental income for the year received.
I hope this article provides clear guidance on IRS tax guidelines on what is reportable rental income.