Nadel & Ciarlo, P.C.

How is residential rental income taxed?

For landlords of residential property in New York, there are a few points to keep in mind as we enter the tax season. Rent payments from residential property are of course considered taxable income. But rental income also includes advance rent, which must be reported in the year it was received. So, if a landlord collects the first and last months of rent in the first year of a multi-year lease, both payments are included in gross income in that first year.

A security deposit is not considered taxable income if the lease provides it will be returned at the end of the lease term. But, if the security deposit is used as the final rent payment it must be reported as income in the year it was received. If the landlord withholds all or part of the security deposit at the end of the lease due to damage caused by the tenant, the amount withheld is considered income in the year it was withheld.

A landlord can deduct the ordinary and reasonable costs of maintaining and managing the property. Repair expenses can also be deducted, as long as the repairs are performed solely to keep the property in good condition. If they add value or adapt the property to another use they may be considered improvements, which are not deductible.

Renting out real estate is generally considered a passive activity for tax purposes, which means deductions are limited. If the landlord is considered a real estate professional, however, the deductions are not subject to the passive activity limitations.

Renting residential real estate in New York can be a very profitable business. It is critical, however, to follow all applicable laws, including tax laws. Landlords may wish to seek professional help to ensure they are in compliance.

Source: Internal Revenue Service, "Tips on Rental Real Estate Income, Deductions and Recordkeeping," accessed March 21, 2016

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