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.