I have noticed that there seems to be some confusion as to what constitutes reportable annual rental income that should be listed under the Gross Rents box on form 1099 and 1042-S. The purpose of this article is to help all property managers and property landlords to have a clear understanding of the tax rules that apply to this box.
The following are common types of income:
Advance rent is any amount you receive before the period that it covers. Include advance rent in rental income in the year received regardless of the period covered or the method of accounting you use.
Example On May 15th, 2011 you signed a 2 year lease to rent property. The tenant decides to prepay the entire lease. You receive $10,000 for the first year’s rent and $10,000 for the rent on the second year. The whole $20,000 must be reported on form 1099 in 2011.
Canceling a lease
If tenant pays to cancel a lease, this payment is reported as income. Include the amount on form 1099 in the year that it is received.
Expenses paid by tenant
If tenant pays any of your rental expenses, the amount paid should be included in gross rent and you would also deduct the expense.
Example: If the furnace in the rental property stops working and the tenant pays for the necessary repairs and deducts the amount from the rent payment. The amount paid by the tenant would be included in rental income and the repair would be deducted as an expense.
Property or Services
If you receive property or services as rent instead of money, include the fair market value of the property or services as rental income in the year received.
Example: Tenant is a house painter. He offers to paint your rental property instead of paying two months rent. You include in rental income the amount he would have paid for rent and deduct the same amount as an expense. Security Deposits: This is the area I see the most confusion in. Do not include a security deposit in rental income when you receive it if you plan to return the deposit to the tenant at the end of the lease. If you keep part or all of a security deposit during the year because your tenant does not live up to the terms of the lease, include the amount you keep in rental income for the year. If an amount called a security deposit is to be used as final payment of rent, it is advance rent and should be included in rental income in the year received.
I hope that this article gives clear direction on the IRS tax guidelines for what is reportable rental income.