Rental Property Income and Expenses
Owning a rental property can be a great way to diversify your investment portfolio and take advantage of other tax deductions available to you. You'll report any income and expenses from your rental property on Schedule E - Supplemental Income & Loss. You'll also file a Form 4562 - Depreciation and Amortization so that you can claim a depreciation deduction on your rental property. Don't worry Turbotax guides you through entering your rental income and expenses.
Rental income is income you receive from renting a home, condominium, or other residential property that you own. It can also be income you receive from someone who simply rents a room from you.
This income may or may not be reported on a 1099-Misc. Some management companies that collect rent for you or the Housing Authority that provides rental assistance to your tenants issue 1099-Misc to owners of rental property.
Even if the income is not reported on a 1099-Misc, you must keep track of and report the rental income.
Rental income is counted when it is actually and constructively received.
Some examples of rental income are:
- Regular rental receipts
- Amounts paid by your tenant to cancel a lease
- Advance rent
- Expenses paid by a tenant
- Security deposits if they are not required to be returned
Don't worry, whenever you rent property that you own, you will be able to take advantage of deductions for many of the expenses that you incur while you own the property.
Some examples of deductible expenses include:
- Real Estate taxes
- Depreciation on the building or unit
- Depreciation on the appliances and furniture
- Management expenses
- Maintenance and repair expenses
- Salaries and wages
- Traveling expenses to visit the property
- Legal fees
- Mortgage interest on the property
- Insurance premiums
- Tax return preparation
- Lease cancellation cost
- Advertising
- Supplies
Here's how to get to the 1099-R screens in the TurboTax Online:
- Select the Tools button in the upper right-hand portion of the screen.
- Select Topic Search.
- When the window opens, type "sale of business property" into the box, select the sale of business property item, and then select GO.
- Follow the on-screen instructions to enter the information from your sale of your rental property.
Here's how to get to the 1099-R screens in the TurboTax desktop or CD/download version:
- Enter your cursor into the search box in the upper right-hand portion of the screen.
- Type "sale of business property" into the box, click on the sale of business property item.
- Follow the on-screen instructions to enter the information from your sale of your rental property.
Please Note: The Sales Price can be found on 1099-S box 2 Gross Proceeds (if you received one), which is generally your contract sales price. You will also see Gross Proceeds on your settlement closing statement.
Sales Expenses are cost incurred when selling your property as follows:
- Sales commissions
- Advertising Expenses
- Legal Fees
- Broker Fees
- Transfer taxes
Cost Basis is your purchase price (price you paid) + fees paid in connection with the purchase such as legal fees, abstract fees, survey charges, and owners title.
Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of your rental property over the time you use the property.
It is an allowance for wear and tear or obsolescence of the property. To claim depreciation, your property must be used in an income-producing activity.
The useful life must extend beyond a year placed in service.
How is it calculated?
TurboTax calculates depreciation for you. You just need to know the cost basis which is the cost plus cost of home improvements and fees in connection with the purchase such as legal fees, abstract fees, survey charges, and owner’s title.
When you input your asset as “residential rental property” TurboTax automatically assigns the correct recovery period for depreciation per IRS guidelines. The recovery period is the assets useful life.
Conventions are used to determine the number of months you can claim depreciation in the year you place property in service and the year it is disposed of. The mid-month convention is used for residential rental property.
TurboTax figures out your depreciation for you based on your entries entered on the “Tell Us About This Asset/Large Purchase” screen where you are asked cost information.
Depreciation on your rental property is calculated in accordance with the IRS guidelines in TurboTax.
To figure out depreciation, TurboTax determines:
- Depreciation system
- Property class
- Recovery period
- Convention
- Depreciation Method
You don’t have to be concerned with these complicated calculations. TurboTax will prompt you to enter the date purchased and cost information to arrive at the accurate depreciation figure.
Costing Terminology
Depreciation -Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of your rental property over the time you use the property.
Cost Basis- Purchase price + cost of improvements – depreciation.
Adjusted basis – Purchase price(price you paid) + buying cost(cost incurred to buy property) + home improvement costs + selling costs(legal fees, bank costs, and sales commission) – prior year depreciation
Home Improvement Costs – Home improvements add value, prolong the useful life, or adapt your home to new uses. The costs of these improvements are added to the basis of your property. Some examples of home improvements are as follows:
- Room additions
- Heating and air conditioning units
- Landscaping
- Hardscape
- Swimming Pools
- Fences
- Retaining walls
- Sprinkler systems
- Plumbing
- Water Heaters
- Insulation
- Carpeting
- Flooring
- Built-in appliances
- New roof
- Satellite Dish
- Security System
SeeIRS Publication 523 for a more comprehensive list of home improvements.
Sales Price – Price paid for the property. Generally your contract sales price which can be found in box 2 of your 1099-S. Can also be seen as Gross Proceeds on your settlement closing statement.
Sales Expense– Transaction costs that you incur when selling your property like:
- Sales commission
- Advertising
- Legal fees
- Loan charges paid by the seller, such as loan placement fees and pmts.
- Broker fees
- Transfer taxes
- Option premiums
