Owning rental property can provide steady income and long-term wealth, but understanding how to handle taxes on that income is essential. Proper reporting and careful expense tracking help you stay IRS-compliant while maximizing deductions.

Reporting Rental Income

Rental income includes any payments received for the use of your property, whether in cash, goods, or services. If you report on a cash basis, income is included in the year it is received, even if it’s technically for a future period.

• Advance Rent: Money received ahead of the rental period is taxable in the year you receive it. For example, if a tenant pays the first and last month’s rent upfront, both payments count as income that year.

• Security Deposits: Funds meant to be returned aren’t taxable. However, any portion kept for damages or unpaid rent is taxable in the year retained.

• Tenant-Paid Expenses: Payments from tenants for utilities, maintenance, or repairs count as rental income, but the corresponding expenses are deductible.

• Goods or Services in Lieu of Rent: If a tenant provides services such as landscaping or minor renovations instead of paying rent, the fair market value of those services is rental income, and you can deduct the cost of providing the service.

Deductible Rental Expenses

You can reduce taxable rental income by deducting ordinary and necessary expenses, including property taxes, insurance, mortgage interest, repairs, and maintenance.

• Mixed-Use Properties: For properties used partially for personal purposes, such as a vacation home or occasionally occupied unit, expenses must be divided between personal and rental use. Only the rental portion is deductible.

Planning Tips for Property Owners

Accurate records and proactive planning are key to maximizing rental income and minimizing tax liability. Understanding the rules around rental income and deductible expenses helps avoid surprises at tax time and ensures you take advantage of every opportunity to reduce taxes.

Tavola Group Can Help

Managing rental property taxes can become complex, especially for investors with multiple or mixed-use properties. Tavola Group’s integrated advisory approach combines accounting, tax, and financial expertise to help you maximize deductions, simplify reporting, and grow your real estate investments with confidence. Reach out today to optimize your rental income and tax strategy.