How your residential rental income is taxed depends on the type of property you rent out, your personal use of the property, whether the property is considered a dwelling unit used as a home, and your participation in the rental activity. You may be able to claim all your rental expenses, even if you end up with a loss, or your loss may be subject to certain limitations.
In general, all amounts you receive as rent are includible in your income subject to U.S. federal income tax. You may be able to claim certain expenses you incur in connection with your rental income.
If you rent out part of your property, such as a part of your home, you must divide your expenses between rental use and personal use.
Likewise, if you rent out a vacation home part of the year, you must also divide up your total expenses related to the vacation home between rental use and personal use.
And, if you change your property from personal use to rental use during the year, you will also need to divide yearly expenses, such as taxes and insurance, between personal use and rental use.
If you do not rent out your property to make a profit, you can deduct your expenses up to the amount of your rental income.
Rental income includes periodic (monthly) rental payments and also includes any amounts your tenant pays you to cancel a lease, any expenses the tenant pays on your behalf, and the fair market value of any property or services you receive as payment of the rent. A security deposit that you intend to return to the tenant at the end of the lease term is not rental income. But if the deposit is intended to be used as a final payment of rent, it is advance rent and must be included in income when you receive it. Also, any part of a security deposit that you keep because the tenant does not live up to the terms of the lease must be included in your rental income.
If you grant the tenant a lease with the option to buy, the payments you receive are considered to be rental income until the tenant exercises the option. Payments you receive for periods after the date of sale are considered to be part of the selling price.
If you rent property that you also use as your home, and you rent it fewer than 15 days during the year, you do not have to include the rent in your income and you cannot deduct any rent expenses.
When To Report
Rent is included in income when you receive it, if you report on the cash basis, and in the period for which the rent corresponds, if you report on the accrual basis. But rent paid in advance is included in the period when you receive it, regardless of the period it covers or the basis of reporting you use.