What is Considered Rental Income?
So, what exactly is considered rental income. Well, it’s exactly what it sounds like; all gross income you receive in the form of rent. This includes any advance rent, security deposits, or payment for canceling that you receive ahead of time. However, if you plan to return the security deposit to your tenant at the end of the lease, do not include it in your income. Any rental income you incur must be reported for any properties under your name.
Let’s say you have a ten year lease to rent out your property. The first year you receive $5,000 and the first year’s rent and another $5,00 for the last year’s rent. You would go ahead and include $10,000 in your income for that year.
Improvements:
Improvements increase the value of your property. Think of improvements as long term updates. Rather than short term fixes, think about how long this improvement will last. Will it not only enhance the useful life of the property today, but five years from now?
Improvements are categorized as “capital expenses.” This means that they must be capitalized and depreciated. Over time, you are only allowed to deduct a small amount each year.
According to the IRS these are some examples that qualify as an improvement.
- Bathroom renovation
- Kitchen renovation
- Roof replacement
- New HVAC system
If you’re still having trouble determining whether something is an improvement, think B.A.R. (Betterment-Adaptation-Restoration). Whether you are bettering your rental property with a bathroom remodel, adapting something to a new purpose, or restoring an existing shed out back, it’s an improvement.
Repairs:
These are usually the fixes that will help keep the property in pretty good shape, but typically won’t add value over time. Cost is typically irrelevant, but in general, repairs will typically be under $500. If you fix a hole in the wall or unclog a shower drain, it would be considered a minor repair and you would be able to deduct it from that year’s tax liability. Here are some things the IRS considers to be repairs:
- Replacing broken tiles (retiling the entire floor is an improvement)
- Fixing a running toilet
- Steam cleaning hallway carpet
- Replacing rotted planks on a deck
If you’re still confused, the IRS has a running list of projects that improvements vs. repairs. Publication 527 will help clarify.
Deducting:
When deducting improvements from your taxes, it’s best to start saving any receipts ahead of time. That way when the time comes, you’ll have them all ready for you in one spot. With the fact that improvements add value, you’ll also want to perform improvements in depreciation. This will help save you trouble with the IRS.
Repairs are easy. All you have to do is take the sum of all the repairs you want to claim, including materials and labor. However, you cannot pay yourself labor fees for any repair work you did yourself. You can claim materials if you fixed a broken faucet yourself, just not the cost of your time.
By: Mike Oborn