Taxpayers who own rental property are subject to special tax considerations when it comes to reporting their rental income. The good news is that the agency allows these taxpayers to claim several expenses as tax deductions against this income so that they can reduce their taxable gain. In order to take advantage of these deductions, taxpayers must keep good records of their income and expenses to document their claims. Here are a few rental income tips to help taxpayers keep up with their obligations to the IRS. 

What Counts as Rental Income?

In general, all monies you receive from renting property are considered rental income. This would include income monthly rent payments, late fees, reimbursements for expenses, non-refundable deposits, advance rent, lease cancellation fees, and reimbursements for utility payments. To ease the stress of trying to remember what payments you received and when, it's a good idea to keep a receipt book and to issue a receipt for every payment, keeping a copy for your records. This is especially important if you receive payments in cash.

Tax Deductions for Landlords

The IRS allows landlords to claim several expenses associated with rental property as deductions against income. These expenses include typical costs such as repairs and utilities, but they also include occasional costs such as taxes, advertising, and insurance. Property based businessmen can also submit tax claims of depreciation as an expense by completing Form 4562 and deducting the appropriate amount for each year that the property is "placed in service", or used for rental purposes. As with collecting income, taxpayers should keep good records of their expenses so that they can support these deductions if they need to show documentation of their claims.

How to Report Rental Income and Deductions

Rental income and expenses should be reported using Schedule E, which details the amount of rental income received and the costs incurred. After listing the expenses and subtracting them from the gross income, taxpayers arrive at their net rental income, which they then transfer to the income section of Form 1040. Net rental income is then included in the other income for the year and adjusted to arrive at adjusted gross income (AGI).

To avoid facing potential troubles, landlords must make a habit of recording their income and expenses. They'll also need to report them accurately on their federal tax returns. If you're a landlord and you need assistance in this area, you may benefit from seeking the assistance of a qualified tax accountant.