If you own a farm and rent out some or all of it, the rent is taxable income. Money you spend on the rental -- repairing equipment, for instance -- is a deductible expense. How you report it depends on whether your investment is active or passive in the eyes of the IRS. If you're actively involved, you report income and expenses on Schedule F along with any other farm income. If you just accept the cash and mostly leave the renter alone, you use form 4835, Farm Rental Income.
Review the IRS standards for "material participation" in farm rentals. If you make management decisions about the rental operations, contribute more than half the tools or put up more than half the cost of the farm, you're materially participating. If not, it's a passive activity and you use 4835 instead of Schedule F.
Report any rental-related expenses on Part II of Schedule F. You can deduct vehicle expenses, fertilizer, feed, vet bills, insurance, maintenance and repairs, along with other expenses. You cannot, however, write off personal living expenses -- the expense of growing food for yourself and your family, repairs and property taxes on your farmhouse -- that don't affect the income-producing part of the operation.
Subtract your expenses from the income to determine your net gain or loss, then add that in with your other farm income and expenses. If the total is a net loss, report it on your 1040. You can deduct the loss from your other income, though IRS rules limit how much you can write off.
Report your rental income on the first part of Form 4835.
Report any rental-related expenses in Part II of the Form 4835.
Subtract your expenses from your income to determine your net profit or loss from the rental. Report the total on line 40 of Schedule E, the form for reporting income from rental real estate.
Total your net rental income from all sources and report it on your 1040 line 17. If you have a net loss from passive rentals, you can't deduct it from non-rental income but you can carry it over to later years.
- If you materially participate and pay self-employment tax on your rental income, you can write off part of the tax on your 1040.
- Keep records documenting any of the expenses you claim. If the IRS ever audits you, you'll need evidence the write-offs are real ones.
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