Where do I enter income and expenses from a rental property?
If you collect rent from someone who lives in a property that you own—even if it's just a room in your house—you're considered a landlord and must report the rent you receive as taxable income.
The rent is considered income in the year you received it, even if the rent covers a time period in a different year. In other words, your tenants' rent payment for January of 2013 collected in December of 2012 gets reported on your 2012 return, as does a 2011 rent payment that wasn't received until 2012.
To offset your rental income, the IRS lets you deduct expenses and depreciation related to the rental. We'll show you how to enter both your rental income and expenses in the next section, below.
Tip: Although TurboTax Basic and Deluxe will handle rental income, we recommend TurboTax Premier or Home & Business. Both versions contain over 20 available deductions for landlords and will determine the depreciation method that gives you the biggest deduction. More info
Entering rental income and expenses
First, if your rental property is located out-of-state, do this before entering your rental-related income and expenses:
- Open your return.
- Click the Personal Info tab and continue to the Your Personal Info Summary screen.
- Scroll all the way down to the last section, Other State Income, and click the corresponding Edit button.
- Make sure you answered Yes to the question Did You Make Money in Any Other States?
- Select the state your rental property is located in from the drop-down list, then click Continue.
- If your rental is located in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming, leave No Entry in the drop-down and just click Continue.
This ensures that TurboTax sets up your state programs correctly when it comes time to file your state taxes. (In most cases, you'll need to file a nonresident return for out-of-state rental property. More info)
Now – let's get started!
- In TurboTax, click Federal Taxes, and then click Wages & Income > Explore On My Own.
- Home & Business: Click Business, then Continue, then Explore On My Own.
- On the Your 2012 Income Summary screen, scroll down to the Rentals and Royalties section. Click the Start button on the right.
- Home & Business: This screen will be titled Your Business Income.
- Answer Yes to the question Did you have any rental or royalty income and expenses in 2012 for property you own?
- Follow the on-screen instructions to enter information about your rental.
- Eventually, you will come to a screen where you can enter your rental income, expenses, assets, depreciation, and vehicle expenses. Click the Start button to the right of each section to enter those items.
Out-of-State Rental Property
Don't forget to file a nonresident return if your rental property is located in a state that collects income tax. TurboTax can easily handle that for you.
Make sure you followed both sets of instructions above. When finished, click State Taxes to get started on your state tax return(s).
Tip: Prepare your nonresident state return(s) before your resident return so that TurboTax can properly calculate the credit for taxes paid to another state.
Are security deposits taxable?
Not if you intend to return them to your tenants at the end of the lease.
(On the other hand, deposits for the last month's rent are taxable, because deposits are considered "advance rent".)
If you end up keeping part (or all) of the security deposit because your tenant didn't uphold the terms of the lease, you must include that amount in the income that you show on your tax return for the tax year in which the lease terminates.
Make sure to keep track of the security deposits from year to year. For more information about the proper handling of security deposits, see IRS Tax Topic 414 – Rental Income and Expenses.
What kinds of rental property expenses can I deduct?
The IRS lets you deduct ordinary and necessary expenses required to manage, conserve, or maintain property that you rent to others.
You're allowed to deduct these expenses if your property is vacant, as long as you're trying to rent it.
Also, expenses must be deducted in the year they are paid. For example, if a pest-control company serviced your rental in 2012 but you didn't pay them until 2013, you'd deduct the expense on your 2013 tax return.
Deductible expenses include, but are not limited to:
- Cleaning and cleaning supplies
- Maintenance and related supplies
- Travel to and from the property
- Management fees
- Legal and professional fees
- Taxes and tax return preparation
- Lease cancellation costs
- Real estate taxes
- Mortgage interest
- Note: Per IRS guidelines, you cannot deduct the mortgage payment; only the interest is deductible.
Major improvements that add to the value of your rental property, prolong its life, or adapt it to new uses are also deductible, but they must be depreciated over a period of time rather than deducted as a current-year expense.
For example, if you spent $8,000 on a new roof, major appliances, or furniture, and collected $20,000 in rent last year, you cannot simply subtract the cost of these items from your rental income to come up with $12,000 in net rental income. Instead, the $8,000 must be depreciated over time.
Improvements are entered in the Assets/Depreciation section of the rental interview as opposed to the Expenses section. These include things like:
- New roofs
- Heating and AC units
- Water heaters
- Built-in appliances
- Sprinkler or irrigation systems
- Hardscaping (pavement, block walls, patios)
- Swimming pools and spas
- Security systems
See IRS Publication 527 for a more comprehensive list of expenses and improvements (the improvements are at the bottom of the page).
Note: Although it doesn't seem logical, refinance fees and mortgage points are also entered in the Assets/Depreciation section. The IRS considers these "amortizable intangibles" which means they must be depreciated, not expensed.
What is depreciation and how does it differ from an expense?
Depreciation lets you deduct the "used up" portion of an asset's cost year after year, until the entire cost is used up or you no longer own it. It allows for wear and tear or obsolescence of the property or asset.
Depreciation deducts the asset's cost over time rather than deducting it all at once, as you would when deducting an expense.
Rental property is considered a depreciable asset, as are major improvements such as new roofs, landscaping, refrigerators, water heaters, furniture, and so forth.
On the other hand, expenses are used to deduct the entire cost of services, utilities, fees, and consumable items (cleaning supplies, light bulbs, smoke alarms and batteries, etc.).
Don't worry too much about the ins and outs of depreciation – TurboTax will handle that for you. TurboTax Premier and Home & Business versions will even figure out which depreciation method gives you the biggest tax break, based on your particular situation.
I sold my rental. Where do I enter that?
Simple. Just go to the Entering rental income and expenses section above, and follow Steps 1–3 in the second set of instructions.
As you proceed through the TurboTax rental interview, look for a screen titled Do Any of These Situations Apply to This Property?
On that screen, select the second checkbox (I sold or disposed of this property in 2012) and then click Continue. Then, just keep following the on-screen instructions.
Terminology and Definitions
- Sales Price – If you received a Form 1099-S, look in Box 2 (Gross Proceeds), which will generally be your contract sales price.
- You can also use the Gross Proceeds amount from your settlement closing statement.
- Sales Expenses for selling your property include:
- Sales commissions
- Advertising Expenses
- Legal Fees
- Broker Fees
- Transfer taxes
- Cost Basis is the rental's purchase price plus buying costs (fees you paid in connection with the purchase such as legal fees, abstract fees, survey charges, owner's title, etc.) plus improvements, minus depreciation.
- Adjusted basis is the rental's purchase price plus buying costs plus improvements plus sales expenses, minus prior-year depreciation.