Rental Real Estate Income

Rent you recognize during the year for each property under your accounting method is entered in the appropriate column of Schedule E, on Line 3. For most taxpayers, this means all rent received during the calendar year, whether it's received directly or indirectly (for example, if your tenant makes repairs for you in exchange for a rent credit, or pays some tax, utility, or repair bills you owe under the terms of the lease).

If you receive a security deposit, it doesn't count as rent unless and until you determine that you're entitled to keep some of the deposit because your tenant violated the lease or damaged your property in some way. Also, if your tenant buys out the remainder of the lease term with a cash payment, the payment counts as rent. If you receive some rent in advance of when it's due, you must count it as income regardless of your accounting method.

If you are leasing the property with an option to buy, the payments you receive are considered rent. If and when the tenant exercises the option to buy, payments received after the date of the sale would be considered part of the selling price.

Warning Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax— Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you. Also, note that the IRS has issued new depreciation regulations that generally apply to tax years beginning on or after January 1, 2014. But, for 2012 and 2013, it also provided taxpayers with the ability to elect certain regulations. The best choice for each taxpayer depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you and your business.