Reporting Rental Income on 2020 Tax Return

Posted on March 23, 2020March 23, 2020 by author

Tax day 2020 is approaching quickly, and for many Austin taxpayers, it means spending many hours in front of a computer or with an accountant sorting out their year’s financial activities. For investment property owners, though, it can mean a much more complicated process. Owning a Central Texas property from which you receive income adds another layer of taxpayer responsibility. As an experienced Austin property manager, Dona Brown, offers Texan rental owners expert insight to help navigate 2020’s tax day.

There are two types of taxpayers when it comes to real estate income: cash-basis taxpayers and accrual method taxpayers. The cash basis approach is reporting income on your tax return the year you actually receive it versus an accrual method that reports the income when you earn it. Most often, property owners are cash basis taxpayers that need to understand how and when to report income.

Owning rental properties and investment real estate comes with responsibilities, including claiming all gross rental income. If you are preparing your taxes for 2020 and you own investment properties, you’ll want to understand these key definitions of rental income.

What is Rental Income?

Rental income is the gross of all income amounts you receive for the use of a property, and all income must be reported. As a general rule for cash-basis taxpayers, you must report all rental payments as income in the year you receive it. However, there are various ways rental income is defined.
Advance rent – any amount of rent received in advance of the period it covers. The income must be reported for the year it is received, not the period it covers.
Security deposits used as a rent payment – any deposit to be used as a rent payment (such as the last month’s rent) must be reported for the year in which it was received unless it is to be returned to the tenant. When any part of the security deposit is retained for damages, include that amount as income, reported the year it is retained.
Payment for canceling a lease – any amount you receive for terminating a lease agreement is considered rental income that needs to be reported.
Expenses paid on your behalf – any payments a tenant makes on your behalf such as a utility bill that they then deduct from regular rental payments must be claimed as rental income.
Services or property received in lieu of rent money – if a tenant chooses to provide a service such as painting in lieu of rental payment, the amount of rental income that service is replacing is required to be reported.
Lease with option to buy – the rent payments received under this agreement are considered rental income to be reported.
Partial interest in a rental property – if you own a partial interest in a property receiving rent, you are required to report your portion of the income received.

As an owner of rental real estate, be sure to understand your responsibilities to the IRS and consult a tax professional with any questions you have. If you need a recommendation or are considering a property manager to help you handle your investment properties, contact Dona Brown, Talk Property Management. We are Greater Austin area professionals, and we’d be honored to earn your trust. Contact us at (512) 721-1094 or DBrown@TALKPropertyManagement.com.

5 Real Estate Investment Property Red Flags

Posted on November 6, 2019 by author

There are a lot of excellent investment properties out there, and while there are some factors that make a property great, there are also some red flags that may help you narrow down which ones you should avoid altogether.

Is the floor plan functional?
If a home is listed as a four-bedroom home, you want to make sure that all four bedrooms are adequately sized. If one bedroom is particularly small or awkwardly shaped, it may be hard for you to find tenants for that space. You’ll also want to consider the number of bathrooms. It’s unlikely that you’ll find tenants ok with sharing a four-bedroom home with only one bathroom.
What neighborhood and school district does the home fall in?
No matter how beautiful the home, if it’s in a bad neighborhood or zoned for a school district that doesn’t have a great reputation, you’re going to have a hard time finding tenants. Is the area in a high flood zone, close to loud businesses? These are all factors you’ll want to look into.
Are there structural issues and damage to the property?
Pay attention to if a property has uneven floors, cracks on exterior walls, etc., as this can be a sign that there are bigger problems with the structural integrity of the home, which can be costly to fix. You should also be looking for roof leaks and checking under countertops and sinks in the bathroom and kitchen for signs of water damage and mold, as this can be another sign that there are major repairs that need to be made.
Have you been asked to waive your right to inspect the property?
We can’t stress this enough. If a seller asks a potential buyer to waive their right to inspect and back out of the deal if they don’t like what they see, turn tail and run. This is a huge sign that something isn’t right with the property. It’s common for a seller to sell a property as is without making any repairs, but it’s not common to ask a buyer to lock into a deal without an inspection.
Are you being met with resistance to see the inside of the property?
If you’re having trouble nailing down a date and time to see a property or are even being kept from checking out the whole property, it’s a big sign that the seller is hiding something. The golden rule to live by: Never buy an investment property without seeing 100% of what you’re getting into and after receiving an inspection that gives you an idea of what the property will need maintenance-wise.

If you still have questions on investment properties, don’t hesitate to reach out! We’re more than happy to share some of the knowledge, tips, and tricks we’ve picked up over the years to make sure you make and maintain a great investment.