If you own property that you rent out to tenants or other people when you aren't using it, you may have rental income that is taxed.Rental income is taxed like other income.Schedule E, Supplemental Income and Loss is used to calculate your taxable income.
Step 1: Do you want to be a cash basis or accrual method taxpayer?
The more common method is the cash basis.Rental income can be reported with a cash basis method.You report rental income based on when you earn it.
Step 2: You have to add up all the sources of income from your rental properties.
Fees paid to cancel a lease; utilities and other expenses paid by the tenant; Services or property you received for rent instead of cash; and Security deposit amounts that you decide to keep are included in this.The security deposits you receive and the return to the tenant at the end of the lease are not included.If you receive a security deposit of first and last months' rent, those amounts should be included in your gross income.
Step 3: After "Rents received," enter that total on Line 3.
It is possible to list rental income for as many as 3 properties on a single Schedule E.Make sure the addresses you list are in line with the rents.You own houses for rent on 123 Main Street and 345 Mulberry Street.The Mulberry Street house is next to "B."Make sure you put the Main Street house rent in column A when you fill in your income.Assume that you received $100,000 in rent for the house on Main Street and $80,000 on Mulberry Street.You must use an additional form if you have more than 3 rental properties.
Step 4: You should organize expenses on each rental property.
You can deduct expenses for maintaining and managing your rental properties.Advertising, management fees, repairs, supplies, taxes, and utilities are some of the categories on Schedule E.Put your expenses in the correct box when you add them up.If you have more than one property listed on the schedule, make sure you match the expenses in the column for the correct property.
Step 5: If you want to calculate depreciation expenses, you have to.
While repairs such as painting or replacing a roof can be deducted at once, improvements like adding a swimming pool or installing new insulation need to be depreciated over several years rather than deducted in the year you paid for them.When you eventually sell the property, depreciation expenses will increase your gains and reduce the cost basis of your rental property.You need to take your cost or other tax basis for the property, allocate that cost to the different types of property included in your rental, and then use the rates, methods and useful lives specified by the IRS to find your annual depreciation.If you rent out a house, you can allocate a portion of the cost to land.Look at the local property tax assessment to see how the value of the property is divided between improvements and land.You don't get a depreciation deduction for land.If 20% of the property's value is allocated to land, you would allocate $40,000 to it, which is not depreciated.You can allocate $160,000 to the building, which will be depreciated over the course of 27 years.Fence or furniture can be depreciated using the declining balance method.The IRS suggests you use a 200% declining balance to depreciate furniture.The declining balance tables are published by the IRS.
Step 6: You can enter the total on Line 20 of your Schedule E by adding all your expenses.
Suppose you have $50,000 in expenses for your Main Street house.Line 20 is where you would enter that amount.Line 20 would show the amount of expenses for your Mulberry Street house.
Step 7: Subtract your expenses from your income on Line 20 and enter the result on line 21.
This amount will be taxed as income from your rental property.You have a loss on your rental property if the amount is negative.If your losses are deductible, you will have to consult other forms.
Step 8: Line 21 and Line 24 have a positive amount entered.
Losses should not be included on this line.If you received $100,000 in rent for your Main Street house, but only incurred $50,000 in expenses, your income is $50,000.The Mulberry Street house has no rental income because your income and expenses are the same.
Step 9: Line 25 has losses entered.
The deductible rental real estate losses you entered on line 22 are included.If you have an adjusted gross income of less than $100,000, you can deduct as much as $25,000 a year in losses on rental properties.
Step 10: You can enter the result on Line 26.
You should include this amount on your tax return.If you had two houses on Main Street and Mulberry Street, your total rental income would be $50,000.