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In the simplest terms, rental income is any payment received for the use or occupation of property. Most landlords operate on a cash basis. That means they count payments as income in the period they are received and deduct expenses in the period they are paid.

Landlords also need to be aware of other forms of rental income that may need to be declared. Rental income may also include:

• Advance rent payments
• Early-termination fees on lease agreements
• Expenses paid by tenant for the landlord (These may also be deductible as rental expenses.)
• Property or services received in lieu of money (This is based on the fair market value of the property or services.)
• Lease payments with option to buy (These payments are usually counted at rental income. If the tenant buys the property, payments received after the sale date are generally counted as part of the selling price.)
• Payments for renting a portion of your home may or may not be taxable income depending on certain thresholds. See IRS Publication 527, Residential Rental Property.

Security deposits are not counted as income if they are to be refunded at the end of a lease period per an agreement. Landlords sometimes retain portions of security deposits because tenants don’t live up to the terms of a lease. Any funds withheld from a deposit are counted as income in the year they are retained. Deposits used as final lease payments are considered advance rents and counted as income in the period they are received.

FS-2007-21, July 2007