Those who own rental property must proceed with caution during tax season
Given that we are now mere days away from Tax Day 2017, those sitting down in their kitchens and home offices to finish their tax returns at the eleventh hour will want to make sure that they proceed with the necessary diligence.
In other words, they should be doubly careful to ensure that they didn’t overlook anything in their haste and that their return is substantiated by good records. Indeed, any failure to do the latter can pose major problems in the event their return is selected for an audit by the Internal Revenue Service.
One class of taxpayer who experts indicate must be particularly vigilant when preparing their tax returns are those who own rental real estate.
In general, those who are cash basis taxpayers must report rental income for the year in which it was received (regardless of when it was earned), and deduct rental expenses for the year in which they were paid on Form 1040, Schedule E, Part 1.
As to what constitutes rental income, it includes some of the following:
- Normal rent payments
- Advance rent payments
- Security deposits used as final rent payment
- Lease cancellation payments
- Expenses paid by tenants
- Services or property received in lieu of rent
- Payments received under a lease with an option to buy
As to what deductions are available for rental expenses, they can include some of the following:
- Ordinary/necessary expenses for conserving, managing or maintaining the rental property
- Costs of maintenance, repairs, supplies and materials incurred to keep the rental property in good operating condition
To reiterate, it’s important for rental property owners to ensure that they maintain good records, meaning those that support both the income and expenses reported. This can include everything from bill and receipts to canceled checks and lease copies.
In the event a rental property owner is selected for an audit, however, it’s important for them not to panic and consider all of their options. Indeed, this may very well include speaking with an experienced legal professional who can protect their rights and best interests throughout the entire affair.