Maya Chen
If you rent out your property, you must report your rental income on your tax return. Rental income is generally defined as any payment received for the use or occupation of property, including cash or the fair market value of property or services. This means that you must include all amounts received as rent in your gross income, even if you receive them in advance or if they are paid for by the tenant in the form of utility bills or repairs. However, security deposits do not need to be included in your income if you plan to return them to your tenant at the end of the lease. On the other hand, if you keep part or all of the security deposit due to the tenant breaking the lease or causing damage, you must include the amount kept as rental income in the year it is kept.
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Rental income
You must include in your gross income all amounts you receive as rent. Rental income includes advance rent, which is any amount you receive before the period it covers. You must include advance rent in your rental income in the year you receive it, regardless of the period covered or the accounting method you use. For example, if you receive $5,000 in rent for the first year of a 10-year lease and $5,000 as rent for the last year of the lease, you must include $10,000 in your income in the first year. Security deposits used as a final payment of rent are considered advance rent and should be included in your income when you receive them. However, if you plan to return the security deposit to your tenant at the end of the lease, you do not need to include it in your income. If you keep part or all of the security deposit because the tenant breaks the lease, you must include the amount kept as income in the year you receive it.
If your tenant pays any of your expenses, such as utility bills or repairs, these payments are rental income and must be included in your income. You can deduct these expenses if they are considered deductible rental expenses. You can also deduct the cost of utility bills and repairs as rental expenses. If you receive property or services instead of money as rent, include the fair market value of the property or services in your rental income. If your tenant is a painter and offers to paint your rental property instead of paying two months' rent, you must include in your rental income the amount the tenant would have paid for two months' rent. You can then include that same amount as a rental expense for painting your property.
If you are a cash basis taxpayer, you report rental income on your return for the year you receive it, regardless of when it was earned. As a cash basis taxpayer, you generally deduct your rental expenses in the year you pay them. Most individuals use the cash method of accounting. If you use an accrual method, you generally report income when you earn it and deduct your expenses when you incur them, rather than when you pay them. You can use Schedule E (Form 1040), Supplemental Income and Loss to report income and expenses related to real estate rentals.
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Security deposits
However, if a landlord withholds a security deposit or a portion of it due to damage, missed rent payments, or a breach in the lease agreement, the withheld amount is considered rental income and must be reported as such in the year it was withheld. For example, if a tenant paid a security deposit of $750 but caused $500 worth of plumbing damage, the landlord would report the withheld $500 as rental income in the year it was withheld.
If a security deposit is intended to be used as the final rent payment, it is considered advance rent and must be reported as rental income when it is received. Landlords should be careful not to double-count the rent in the tenant's final month. Security deposits are generally recorded as liabilities on the balance sheet, reflecting the potential obligation to return the funds to the tenant.
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Deductible expenses
If you own rental real estate, you must report all rental income on your tax return. Generally, you can deduct expenses from renting out the property from your gross rental income. These deductible expenses can include:
- Mortgage interest: You can deduct interest on up to $750,000 ($1 million if the mortgage was taken out before December 16, 2017) of secured mortgage debt on your first or second home.
- Property tax: Homeowners can deduct up to a total of $10,000 ($5,000 if married and filing separately) for property taxes and either state and local income taxes or sales taxes.
- Operating expenses: These may include repairs, maintenance, utilities, insurance, and advertising.
- Depreciation: You can deduct allowances for exhaustion, wear and tear (including obsolescence) of property.
- Travel expenses: You can deduct travel costs to collect rent or maintain your rental property. The standard mileage rate for business use is $0.70 per mile in 2025.
- Improvements: You can recover some or all of your improvements by using Form 4562 to report depreciation.
It's important to note that you can only deduct expenses in the year you pay them if you are a cash-basis taxpayer. Also, expenses paid by your tenant, such as utility bills, are considered rental income, and you may be able to deduct these amounts if they are deemed deductible rental expenses. Security deposits are not taxable when you receive them if you intend to return them to the tenant at the end of the lease. However, if you keep the security deposit due to the tenant breaking the lease or causing damage, you must include it in your income for that year.
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Reporting income
If you receive income from renting out a property, you generally must include this in your gross income. Rental income includes any payment received for the use or occupation of the property. This includes advance rent, which is any amount received before the period it covers. For example, if you receive $5,000 for the first year's rent and $5,000 as rent for the last year of a 10-year lease, you must include $10,000 in your income in the first year. Security deposits are not included in rental income if you plan to return them to your tenants at the end of the lease. However, if you keep part or all of the security deposit because the tenant breaks the lease, you must include the amount kept as rental income in the year you keep it.
If your tenant pays any of your expenses, such as utility bills or repairs, these payments are considered rental income. You can deduct these expenses if they are considered deductible rental expenses. You can also deduct the cost of repairs and maintenance as well as any expenses incurred while the property is vacant. If you receive property or services instead of money as rent, include the fair market value of the property or services in your rental income.
If you are a cash basis taxpayer, you report rental income on your return for the year you receive it, regardless of when it was earned. This means you deduct your rental expenses in the year you pay them. Most individuals use the cash method of accounting, which means they count rental income when they actually receive it and deduct expenses when they pay them. You can generally use Schedule E (Form 1040), Supplemental Income and Loss to report income and expenses related to real estate rentals. If you are not in the business of renting personal property, report income on line 81 and expenses on line 24b of Schedule 1 (Form 1040), Additional Income and Adjustments to Income.
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Cash basis taxpayers
If you are a cash basis taxpayer, you must report your rental income on your tax return for the year you receive it, regardless of when it was earned. This includes all amounts received as rent, such as advance rent, security deposits used as final rent payments, lease cancellation payments, and expenses paid by the tenant.
You can generally deduct expenses from your gross rental income in the year you pay them. These expenses may include mortgage interest, property tax, operating expenses, depreciation, repairs, and utility bills. If your tenant pays for any of these expenses, you must include them in your rental income but can deduct them if they are considered deductible rental expenses.
If you receive property or services instead of money as rent, include the fair market value of the property or services in your rental income. You can also include this amount as a rental expense.
It is important to note that as a cash basis taxpayer, you cannot deduct uncollected rents as an expense because you have not included those rents in your income. Additionally, there may be special rules if you rent out a property that you also use as your main home or vacation home.
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Frequently asked questions
Rental income includes any payment received for the use or occupation of property, including advance rent, security deposits used as final rent payments, expenses paid by the tenant, and payments for cancelling a lease.
If you receive cash as rent, the value of your rental income is the amount of cash received. If you receive property or services instead of money, the value of your rental income is the fair market value of the property or services.
You generally need to report your rental income on your tax return for the year you actually receive it, regardless of when it was earned. If you receive rent in advance, you must include it in your income for the year you receive it.
Yes, you can deduct expenses of renting property from your rental income, including repair costs, utility bills, mortgage interest, property tax, operating expenses, depreciation, and advertising.
You can report your rental income on Schedule E (Form 1040), Supplemental Income and Loss. If you are in the business of renting personal property, you may need to report your income on Schedule C (Form 1040) instead.
