When adding up your rental income for the year, include:

• Monthly rents, even if paid in advance
• Security deposits you kept after a lease ended
• Lease cancellation payments
• Tenant-paid expenses - Ex: Your tenant paid for a repair and deducted the cost from the rent check. Include the repair cost as rent.
• Property or services in lieu of rent - Ex: Your tenant shovels snow in exchange for reduced rent. Include the rent reduction as rent.

If you claim rental expenses for a property where you also live, you might come across these situations:

• Renting out 1 unit of a multi-family home and living in another
• Collecting rent from a roommate living with you in a home you own

If you rent part of your home, you can deduct:

• 100% of expenses directly associated with the rental, including:
• Advertising
• Cleaning the rental
• Rental depreciation
• Legal and professional fees
• Local transportation related to operating the rental.
• Rental repairs
• A portion of the expenses associated with both the rental and your residence, including:
• Homeowner association dues
• Insurance
• Mortgage interest
• Real estate taxes
• Utilities

Ex: Joy's basement is an apartment with a separate entrance and its own kitchen and bathroom. For the entire house, she:

• Receives 1 set of utility bills
• Receives 1 tax bill
• Has 1 mortgage

The basement represents 1 / 3 of her home's square footage. She can deduct:

• 1/3 of her utility bills, real estate taxes, and mortgage as a rental expense
• 100% of expenses for the rental only, like the cost of repairing an appliance in the rental
• Depreciation for the basement apartment only

The rules for reporting vacation home income and expenses depend on how much you:

• Rent out the home
• Use the home

If you rent your home for 14 days or less during the year:

• None of the income is taxable.
• You can only claim deductions on:
• Interest
• Taxes
• Casualty losses

If you rent the home more than 14 days:

• You must report the income.
• You can deduct expenses, which are limited to your rental income if your personal use is more than the greater of:
• 14 days
• 10% of the number of days you rent the home at fair rental value

You can carry forward excess expenses to a future year.

Divide expenses between rental and personal use based on the number of days of personal use:

• Utilities
• Taxes
• Interest

Ex: If your utilities are $3,000 and you used the property personally 10% of the time:

• $300 is considered personal
• $2,700 is available to offset rental income

If you convert your home to a rental property, you can deduct many nondeductible home expenses as rental expenses. These include:

• Depreciation
• Insurance
• Utilities
• Repairs
• Condominium association fees

Make sure you deduct depreciation of your rental property. Each year, you can claim depreciation equal to your basis in the rental - excluding the land - divided by 27.5.

Your basis is whichever of these is less:

• Original cost of the home
• Value of home when you started renting it

Ex: Ann pays $200,000 for a rental property. The building is worth $150,000 and the land $50,000. She can claim a $5454.55 depreciation deduction:

$150,000 ÷ 27.5 = $5454.55

Losses from rental activities are usually passive losses. Passive losses aren't usually allowed to offset other income, like wages and investment income. However, you can use up to $25,000 per year of your losses from rental real-estate activities to offset other income if:

• You actively participate in the rental activities. Active participation includes activities you delegate to others, as long as you:
• Are a 10% owner of the rental
• Make management decisions for the property, like approving tenants and making repairs and improvements
• Your modified adjusted gross income (AGI) doesn't exceed $150,000.
• If married, you live with your spouse and file jointly.

Passive-loss deduction limits won't apply to your rental activity if you:

• Meet the requirements to be a real estate professional
• Materially participate in your rental activity

So, you can deduct your rental losses against other income regardless of your modified AGI. If you qualify as a real estate professional, report your rental income and expenses as self-employment income.

To be considered a real estate professional:

• More than 1 / 2 of the personal services you perform must be in real estate businesses you materially participate in.
• You must perform more than 750 hours of services during the tax year in real property businesses you materially participate in.

Activities that meet the material participation test include related services like:

• Development
• Construction
• Leasing
• Managing or brokering real estate

Amortize your loan costs and deduct them evenly over the loan's term if you incurred these loans costs to finance your rental property:

• Legal fees
• Appraisal expenses
• Brokerage commissions

Ex: If your loan costs are $1,800 and you get a 15-year (180-month) loan, you can deduct $10 a month ($1,800 divided by 180 months) as amortization of loan costs.

The Small Business Jobs Act of 2010 created new expense reporting for landlords beginning with 2011 expenses. You might need to send out a Form 1099-MISC to vendors and contractors you pay a total of $600 or more in 2011. Penalties apply if you don’t issue a required Form 1099-MISC.

Ex: You pay a plumber $610 in 2011 for repairs. In early 2012, you’ll need to send the plumber a Form 1099-MISC reporting the fees you paid as well as send the IRS a copy.

Congress asked the IRS to fine-tune the new 1099-MISC rules. It’s likely there will be exceptions for small rental operations and for payments made by credit or debit card.

To prepare in case you’ll need to issue 2011 1099-MISC forms:

• Keep a record of the name, tax ID, and address of vendors and contractors you might pay $600 or more in 2011, and track your payments to them.
• Use credit or debit cards when possible.