Rental income

If you are subject to U.S. income taxes, you must include in your gross income all amounts you receive as rent.

‘Rent’ is the gross amount of payment received (before any expenses are deducted) for the use or occupation of the property.

It can also include payments received for any goods or services that are provided, e.g. meals, cleaning, etc.

Taxable rental income is the gross amount of rent received less any allowable expenses.

 

(Gross rents collected) - (Allowable Expenses) = Taxable (Net) Rental Income

A positive number becomes taxable income, a negative number is a rental loss.

This can also be referred to as ‘net’ rental income. If the allowable expenses are greater than the gross amount of rent received, a rental loss will arise.

Taxable rental income/(loss) must be reported and calculated on Schedule C or E of Form 1040 (see section 9 “How to report rental income and expenses”).

In addition to the amounts you receive as normal rent payments, you may also receive other amounts that should be carefully considered in determining the amount of gross rental income to report.

Examples of such amounts include:

• Advance rent is any rent you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or if you are a cash or accrual basis taxpayer.
  • if you receive rent in December 2016 that is intended for January 2017, you must include it in rental income in 2016.

• Security deposits are not included in rental income if you have restricted use of the money.
  • if you have to return the security deposit to guests at the end of their stay, it is not included in rental income.
  • If you keep part or all of the security deposit because a Guest damaged the property and you must make repairs, include the amount you keep in that year in rental income if you deduct the cost of repairs as expenses. To the extent the security deposit reimburses those expenses, do not include the amount in rental income if you do not deduct the cost of repairs as expenses.

• If a Guest pays any of your expenses,
  • utility expenses, the payments are rental income.
  • Since you must include this amount in income, you can deduct the expenses if they are deductible rental expenses (defined in section 4 “Expense that can be deducted”).

• If a Guest cancels a reservation and you receive a portion of the accommodation fee, the amount you receive is rent.
  • Include the payment in your income in the year you receive it.

• Any rent refunded to a Guest due to cancellation is not included as net rental income. Tax documents, such as 1099-K, are reported on a gross basis. Any gross rent that is refunded should be included as gross rental income and also taken as a deduction.

 

Example: You receive a payout of $5,000 for a Guest’s 10-day stay. The Guest only stays for 8 days and you offer a $1,000 refund via Airbnb. A $1,000 “adjustment” is placed on your account and automatically deducted from your next scheduled payout of $5,000 for another Guest’s stay. Your total payout is $9,000 ($5,000 - $1,000 + $5,000). Your gross rental income is $10,000 and reported as such on your 1099-K or Earnings Summary. On your tax return, you report $10,000 as gross rent and $1,000 as a deduction to arrive at a net rental income of $9,000.

 

Exemptions:

If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental.

You are not required to report the rental income and rental expenses from this activity on Schedule C or E (Form 1040).

The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040).

See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses.

Definition of Dwelling Unit

A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property.

• It also includes all structures or other property belonging to the dwelling unit.
• A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities.
• A dwelling unit does not include property (or part of the property) used solely as a hotel, motel, inn, or similar establishment.
• Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year.