TurboTax Business Rental Income Help Center

Here we provide information on reporting rental income and expenses in TurboTax Business. Read through the article or select one of the links below to go straight to a section of interest.

• General tips and suggestions
• Differences in reporting rental income for Corporations, S Corporations, and Partnerships
• Passive activity loss
• Reporting rental income and expenses on your tax return
• Taxes on rental income
• Deductions from rental income
• Depreciation of rental property

Keep written documentation

Complete, accurate, and written documentation is crucial in all matters concerning your taxes. Retain all receipts, cancelled checks, bank statements, and paperwork, especially as it applies to expenses you plan to deduct. Make sure you capture the date and detailed description of the expense, and make a note of the property to which the expense applies.

Allocate expenses

If you own multiple properties, and you incur an expense (such as legal advice) that benefits more than one property, you must allocate, or divide, the expense between the properties. Keep a written record of your expense allocation.

Smaller is better...include the details

It is generally better to have more expenses categories and smaller dollar amounts per category than to lump like items into a single account. For example, "Miscellaneous" expenses should be broken down into specific details. "Advertising" might be broken down into newspaper advertising, web advertising, etc. 

Disposition planning

When the time comes to dispose of the property, consider deferring the gain and related tax to a later time using:

• Like kind exchange. Trading the property for another of "like kind" allows you to defer reporting the gain until a later year.
• Installment sale.  Selling the property on an installment plan allows you to spread the gain over multiple years.
• Involuntary conversion. If property is lost to fire, casualty, eminent domain, or another "involuntary" method, consider deferring the gain using this provision rather than recognizing the gain resulting from the insurance payment and buying another property.

Note: Each of these options has its own rules and complexities. A tax professional should be consulted be entering into any agreement involving these options.

 

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When a Corporation owns rental property, it is handled in much the same way as it is for an individual. A Corporation reports the income or loss on its return and pays the tax on any rental income. Losses belong to the Corporation and are subject to passive activity loss rules.

Flow through entities, such as S Corporations and Partnerships/Limited Liability Corporations (LLCs), handle the rental income and expense much like an individual too, but the income or loss flows through to the owners and must be included on their personal tax returns.

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Income from a rental property is, by definition, a passive activity and is subject to passive activity loss rules. In general, the passive activity rules limit the ability to offset other types of income with net passive losses. These rules are quite complex. For detailed information, see IRS Publication 925: Passive Activity and At-Risk Rules.

Here's a brief overview:

• Form 1120 U.S. Corporation Income Tax Return
  Generally, the passive activity rules apply to corporations. The treatment within the tax return may vary, however, depending on a variety of factors such as, the number of shareholders and the nature of the business activity. 
• Form 1065: Return of Partnership Income and Form 1120S: U.S. Income Tax Return for an S Corporation
  Passive activity rules and limitations apply at the individual level.

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Form 1120 U.S. Corporation Income Tax Return
TurboTax Business allows you to submit your rental income, expenses, and depreciation as you go through the interview. You can also navigate directly  to a topic by following these steps:

• Rental Income - Select the Income tab, and then the Rentals sub-tab. Rental income is transferred to line 6: Gross Rents, in the Income section of Form 1120, page 1.
• Expenses - Select the Deductions tab, and then the appropriate expense type from the Overview. Expenses are transferred to the appropriate lines in the Deductions section of Form 1120, page 1.
• Depreciation - Select the Depreciation tab, and the Depreciable Assets sub-tab. Depreciation is transferred to the appropriate lines in the Deductions section of Form 1120, page 1.
  
  Note: If rental activity is substantial compared to the business activity, different rules apply. See IRS Publication 925: Passive Activity and At-Risk Rules  for the details.

Form 1065: Return of Partnership Income
TurboTax Business allows you to submit your rental income, expenses, and depreciation as you go through the interview. You can also navigate directly  to a topic by following these steps:

• Rental Income - Select the Income tab, and then the Rentals sub-tab. Rental income is transferred to line 2: Gross Rents, of Form 8825: Rental Real Estate Income and Expense Worksheet, and then to line 2: Net rental real estate income (loss), in the Income section of Form 1065, page 3.
• Expenses --  Select the Income tab, and then the Rentals sub-tab. Expenses are transferred to the appropriate lines in the Rental Real Estate Expenses section of Form 8825: Rental Real Estate Income and Expense Worksheet, and then to line 2: Net rental real estate income (loss), in the Income section of Form 1065, page 3.
• Depreciation - Select the Income tab, and then the Rentals sub-tab. Proceed through the interview until you come to the Assets and Depreciation screen. Depreciation is transferred to line 14: Depreciation of Form 8825: Rental Real Estate Income and Expense Worksheet, and then to line 2: Net rental real estate income (loss), in the Income section of Form 1065, page 3.

Form 1120S: U.S. Income Tax Return for an S Corporation
TurboTax Business allows you to submit your rental income, expenses, and depreciation as you go through the interview. You can also navigate directly  to a topic by following these steps:

• Rental Income - Select the Income tab, and then the Rentals sub-tab. (Or select Rental Real Estate Income or Loss on the Income Summary screen.) Rental income is transferred to line 2: Gross Rents, of Form 8825: Rental Real Estate Income and Expense Worksheet, and then to line 2: Net rental real estate income (loss), in the Income section of Form 1120S, page 1-2.
• Expenses --  Select the Income tab, and then the Rentals sub-tab. (Or select Rental Real Estate Income or Loss on the Income Summary screen.) Expenses are transferred to the appropriate lines in the Rental Real Estate Expenses section of Form 8825: Rental Real Estate Income and Expense Worksheet, and then to line 2: Net rental real estate income (loss), in the Income section of Form 1120S, page 1-2.
• Depreciation - Select the Income tab, and then the Rentals sub-tab. Proceed through the interview until you come to the Depreciation screen. (Or select Rental Real Estate Income or Loss on the Income Summary screen and proceed through the interview until you come to the Depreciation screen.) Depreciation is transferred to line 14: Depreciation of Form 8825: Rental Real Estate Income and Expense Worksheet, and then to line 2: Net rental real estate income (loss), in the Income section of Form 1120S, page 1-2.

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If you use a cash basis accounting method, report rental income in the year it's received, regardless of when it was earned.

• If you receive rent for January 2007 in December 2006, report the rent as income on your 2006 tax return.
• If you receive a deposit for first and last month's rent, it's taxed as rental income in the year it's received.
• If you receive goods or services from your tenant in exchange for rent, you must value the goods or services at their present worth and report that value on your return in the year that they are received.
• Report income that you have received "constructively". This means that you have the opportunity to receive the income. For example, if your renters place their January rent checks in your mailbox late in December, you cannot avoid reporting it as income simply by not removing it from the mailbox until January.

If you use an accrual basis accounting method, report rental income in the year it's earned, regardless of when it was received.

• If you receive a late payment for December 2006 rent in January 2007, report the rent as income on your 2006 tax return.

Security deposits and last month's rent

• Security deposits are not included in income when they are received if the deposit is to be returned at the end of the lease. 
• Last month's rent is included in taxable income for cash basis taxpayers because it is actually rent paid in advance.
• Last month's rent is not included for accrual basis taxpayers until the tenant's last month of occupancy.

What if I keep the security deposit?

If you keep part or all of the security deposit because the tenant does not live up to the terms of the lease, you must include that amount in your taxable income for the tax year in which the lease ends.

Note: It's important to keep track of the security deposits from year to year. This record-keeping isn't difficult if you only own one rental, but as the number of rentals you own increases, so does the paperwork.

 

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As with all of your deductions, it's important to keep good records and carefully document your expenses. Keep current and accurate records of your expenses paid, including all receipts, checks, and bank statements.

• Expenses include all of those necessary to manage, conserve, and maintain the property.
• Expenses must be ordinary and necessary and not extravagant.
• If the property is temporarily vacant, you can still deduct your expenses as long as the property is offered for rent.

Cash basis taxpayers deduct expenses in the year the expense is actually paid.

Example: The services provided by a repairman in December 2006, which were not paid for until January 2007, are deductible on your 2007 tax return.

Accrual basis taxpayers deduct expenses when the amount of the expense is known and they become liable for the expense.

Example: The services provided by a repairman in December 2006 can be deducted from your 2006 rental income (if the amount owed is known) even if a bill is not received or paid until January 2007.

If you deduct travel expenses associated with rental property, you must divide your expenses between rental and non-rental activities.

Example: A partnership owns a rental condo in Park City, Utah. One of the partners visits in January for five days to do maintenance and hit the slopes. His travel expenses must be allocated between rental expense and personal expense. If he spends two days skiing and three days cleaning, repairing, and painting, 60% of the expenses are deductible as rental expenses. The other 40% of expenses are the partner's personal expenses. 

Deductible expenses include, but are not limited to:

• Advertising
• Cleaning and maintenance
• Commissions
• Depreciation
• Homeowner's associations dues
• Insurance premiums
• Interest expense
• Local property taxes
• Management fees
• Pest control
• Professional fees
• Rental of equipment
• Rents you paid to others
• Repairs
• Supplies
• Trash removal fees
• Travel expenses
• Utilities
• Yard maintenance

Improvements and Repairs

Improvements are actions that materially add to the value of the property or substantially prolong its life. Any improvements to rental property must be depreciated over their useful lives, as defined by the IRS, rather than deducted in the year paid or incurred.

For example:

• Additions to the structure
• Adding a swimming pool
• Installing a water filtration system
• Modernizing a kitchen
• Installing insulation

Repairs are actions that keep the property in good operating condition. Cash basis taxpayers deduct repair expenses in the year the expense is actually paid. Accrual basis taxpayers deduct repair expenses when the amount of the expense is known and they become liable for the expense.
Examples include:

• Minor repainting
• Fixing broken gutters or floors
• Fixing leaks
• Replacing broken windows or doors

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Depreciation is a deduction taken over several years. You generally depreciate the cost of property that has a useful life of more than a year, but gradually wears out, or loses its value due to wear and tear, or wind and rain, when the property is used in business, or to produce income.

To calculate depreciation on your rental property:

1. Determine your cost or other tax basis for the property.
2. Allocate that cost to the different types of property included in your rental (such as land, buildings, etc.).
3. Calculate depreciation for each property type based on the methods, rates, and "useful lives" specified by the IRS.

Determine the cost basis

The cost basis of the property is generally the amount paid for the property - the acquisition cost plus any expenses incurred in making the purchase. This cost basis includes any loan proceeds used to acquire the property. Review the purchase closing documents to identify any other expenses that may be deductible.
Examples include:

• Financing costs
• Interest and taxes
• Homeowner's association dues

If the property is being converted from personal use to rental use, the cost basis in the property is the lesser of the acquisition cost or the fair market value at the time of conversion from personal to rental use.

If the property was a gift, inherited, or traded for another property, there are special rules for determining the tax basis of the rental property.  Consult IRS Publication 551, Basis of Assets, for more information about computing cost basis in these situations.

Allocate the cost by type of property

After determining the cost or other tax basis of the rental property as a whole, the basis amount must be allocated among the various types of property being rented. Types of property refers to certain components of the rental, such as the land it is built on, the building itself, any furniture or appliances provided with the rental, etc. Different types of property are depreciated using different rules and are considered to have different "useful lives".

If the rental is a condo or other property that shares space within a community, the owner is deemed to own a portion of the underlying land. Therefore, even a third floor condo is deemed to own a portion of the land, and a portion of the purchase price must be allocated to the land upon which the building is built.

Calculate the Depreciation of Each Type of Property

Here are the most common divisions of cost basis for a rental property, followed by explanations of the different methods of depreciation.

Depreciation Table

Straight-line depreciation

Cost basis is spread evenly over the tax life of the property.
Example: A residential rental building with a cost basis of $150,000 would generate depreciation of $5,455 per year. ($150,000 ÷ 27.5 years)

If rental property is available for only part of a year, as in the first year it's rented, the depreciation is calculated for the number of months it was available, with the first month counted as one-half of a month.
Example: A residential rental building with a cost basis of $150,000, which was rented in August, would generate depreciation of $2,056 for the year. ($5,455 x 4.5 ÷ 12)

Declining Balance Depreciation

This kind of depreciation is calculated with a complex formula*. It's all around easier to consult the tables in IRS Publication 946: How to Depreciate Property. 

Here's the five-year property table as an example:

Example: Declining balance depreciation on furniture, with a cost basis of $2,400, provided as part of a rental property would be $461 in year 3. ($2,400 x 19.20%)

*We recommend you use the table, but here's the formula referenced above:

Multiply the rate from the table above (150% or 200%) by the straight-line depreciation calculated based on the adjusted balance of the property at the start of the year over the remaining life of the property.

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