- How much rent you report to the IRS each year depends on whether you are a cash or accrual basis taxpayer. The more common method is the cash basis, which requires you to include all rent payments you receive during the year on your tax return. In contrast, an accrual basis taxpayer will only include the rent payments that relate to the particular tax year. For example, if you receive an advance rent payment in December 2011 from your tenant for January 2012 rent, an accrual basis taxpayer would not include this amount on a 2011 tax return, since it relates to 2012. However, a cash basis taxpayer will report the entire payment on the 2011 tax return.
- Since the IRS views your rental property like a business, you can reduce your taxable rental income by any expenses you incur. This can include a wide range of expenditures, such as advertising fees you pay to find tenants, insurance premiums for the rental property, all state and local property taxes, commissions and fees you pay to management companies, the cost of cleaning services, and utility payments if the tenant is not responsible for them. Moreover, if you ever need to make repairs to your rental property, you can deduct those costs as well.
- One of the two forms you may need to report your rental income and expenses is the same Schedule C that self-employed taxpayers use. Generally, the IRS requires this form only when you provide substantial services throughout the year. For example, if you provide regular maid and linen service each day for tenants, then your activity is substantial and requires a Schedule C. In most cases, you need to determine whether your rental properties consume a significant amount of your time, warranting treatment as a separate business. However, if you are a more passive landlord and your tenants don't require much attention, you probably don't need to file a Schedule C.
- For most taxpayers who own just one or two additional homes while maintaining other employment or businesses, reporting rental income and expenses on a Schedule E is more appropriate. Typically, to fill out a Schedule E, your tenants must not require any services from you except for periodic maintenance and repairs. For example, if your tenants generally sign long-term leases and use the property as their principal residence, then it's likely that your active participation is minimal.
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