What income is reported in the 1099-Misc Gross Rents Box?
I have noticed that there seems to be some confusion about what constitutes the reportable annual rental income that must be reported in the Gross Rents field on Form 1099 and 1042-S. The purpose of this article is to help all property managers and landlords clearly understand the tax rules that apply to this field.
The following are common types of income:
Rent in advance is any amount you receive before the period it covers. Include the advance rent in rental income in the year received, regardless of the period covered or the accounting method you use.
Example On May 15, 2011, you signed a 2-year lease for a property. The tenant decides to prepay the entire lease. You get $10,000 for the first year’s rent and $10,000 for the second year’s rent. The entire $20,000 must be reported on Form 1099 in 2011.
Termination of lease
If the lessee pays to cancel the lease, that payment is reported as revenue. Include the amount on Form 1099 in the year it is received.
Expenses paid by the tenant
If the tenant pays some of your rental expenses, the amount paid must be included in the gross rent and you will also deduct the expenses.
Example: If the furnace in the rental property stops working and the tenant pays for the necessary repairs and deducts the amount from the rent payment. The amount paid by the tenant will be included in the rental income and the repairs will be deducted as an expense.
Property or Services
If you receive property or services as rent instead of cash, include the fair market value of the property or services as rental income in the year received.
Example: The tenant is a painter. He offers to paint your rental property instead of paying two months rent. You include in rental income the amount he would have paid for rent and deduct the same amount as an expense. Security Deposits: This is the area where I see the most confusion. Do not include a security deposit in rental income when you receive it if you plan to return the deposit to the tenant at the end of the lease. If you keep some or all of the security deposit during the year because your tenant doesn’t follow the terms of the lease, include the amount you keep as rental income for the year. If an amount called a security deposit is to be used as a final rent payment, it is advance rent and must be included in rental income in the year received.
I hope this article provides clear guidance on the IRS tax guidelines for what constitutes reportable rental income.
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