Many people who own real estate investment properties or are considering getting into this industry run into real estate rental tax concerns. Rental real estate owners are required to pay income taxes on rental income, just like any other income source. However, there are some nuances to the rules that could become traps for the unwary landlord.  Here are 3 of the most common questions that my CPA office hears about rental income:

I require my tenants to pay a security deposit at the start of their lease. Is this considered income that must be reported for tax purposes?

When you receive a security deposit at the beginning of the lease term, and you intend to return it when the tenant vacates and leaves the property in good order, you do not need to include it as income.

However, if your tenant moved out and now you are keeping some or all of the deposit because the tenant didn’t fulfill their lease obligations, you would include as income the amount of the deposit you are retaining, in the year you kept it.

My tenants paid their January rent on December 28. My tax year ends December 31, but because the rent wasn’t due until January 1, can I include it in next year’s rent instead of this year’s?

According to the IRS, advanced rent is considered income in the year you received it, regardless of when it was due and regardless of whether you use “cash” or “accrual” as your accounting method.

My tenant is a plumber and fixed the pipes at the rental property instead of paying rent. Do I need to report anything for income tax purposes?

Yes, you will need to include what he would have paid you in rent as income, even though he paid in services instead. But, you can probably also turn around and take a deduction on your tax return for the services the plumber provided.

To learn more about the accounting, bookkeeping, business strategy and tax services Sean Core CPA PLLC provides for Arizona landlords, contact us online or call(480) 626-5043. Disclaimer: Also, landlords may want to review these tax tips provided by the IRS.