How to Calculate Federal Taxes for Rental Properties

By paying attention to detail, you can buy rental properties that deliver sound investment returns plus keep track of information needed to calculate federal taxes. Accurately preparing your tax forms will keep you out of hot water with the Internal Revenue Service. Getting to the point where tax calculation is possible starts with having specific financial records for each property. Tracking rental income is tricky because it sometimes includes amounts not even paid to you and doesn’t count security deposits when they are paid. You can deduct expenses, but unlike regular deductions, some of them aren’t deductible in the year you pay them.

Gross Rent

Record rent when you receive it, regardless of what period it covers. Include as rental income any expenses paid by your tenant, unless the rental agreement states that these expenses are your tenant’s responsibility. Rental income also comprises the value of any services a tenant performs to substitute for rent. For example, if the tenant paints your rental property in exchange for rent, you still count as income the amount of forgiven cash rental payment.

Security Deposits

Maintain a separate record of security deposits collected. Don’t record any security deposit as income that you expect to return to a tenant at the end of a lease. Reduce recorded security deposits when a tenant moves out by the amount previously collected. Add to gross income only the amount of a security deposit that you keep. A security deposit that your lease agreement states will apply to final rent is classified as advance rent that you count as income when received.

Expenses

Track the totals for each category of ordinary and necessary expense to operate a rental property. Typical expenses are amounts you pay for mortgage interest, property taxes, repairs, insurance, utilities, advertising, and maintenance. Any expenditure is tax deductible if it is common for owners of rental property and necessary to generate rental income. Also, deduct these costs if a tenant paid them. The costs of property improvements are not counted as expenses.

Depreciation

Costs to improve the value or life of a rental property are not deductible expenses. These expenditures are deducted as depreciation over a number of years established in tax rules for the type of improvement. Examples of improvements are adding a fence or replacing a roof. Record improvement costs separately from other expenditures. List an exact description and the date of first use for every improvement. Your cost for a rental unit is also depreciated over several years starting when you first begin renting the property.

 

About the Author

Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.