Owning a rental property comes with many different kinds of tax advantages and deductions that can be helpful at tax time.
Any expenses you incur to maintain or improve a rental property can be deducted from your gross rental income, the Internal Revenue Service reports. You’ll also get a tax break through annual asset depreciation, and you can deduct any travel or marketing expenses incurred while advertising for and meeting new tenants. Other key deductions include insurance, legal and professional fees, interest on mortgage payments, and many different types of operating expenses.
Your rental income, meanwhile, is taxed as ordinary income, so the amount of tax you’ll pay on monthly rental payments is based on your marginal income tax rate. Rental income can be made up of many different components, though, so let’s take a closer look at the various aspects of rental income and whether or not any late fees incurred by your tenants are considered income.
What Makes Up Rental Income?
Although your tenants’ regular rental payments will comprise the bulk of your reported rental property income, there are several other forms of payment that also need to be added to this income pool. These include:
- Late fees
- Early lease termination fees
- Advance rent
- Application fees
- Pet fees
- Bounced check fees
- Washing machine revenue
Security deposits, though, are a different matter altogether. Landlords don’t count these funds as rental income unless they end up keeping a portion of the deposit to cover expenses incurred when refreshing the property to ready it for leasing to another tenant.
Landlords who forgo rental payments in lieu of services rendered, such as painting or laying new carpet, must include the fair market value of these services as income. If your tenant is a painter and offers to spray the interior of an apartment instead of paying $1,000 in rent, then you would include that figure as rental income.
The Bottom Line
Nearly all the money paid by tenants to their landlords each month as part of their lease agreements counts as taxable rental income, including late fees. Landlords can impose late fees only if they are written into the lease agreement, and there are limits to how much of a penalty landlords can impose on late rental payments. Late payments can be set as a flat fee, say $50 to $100, or a percentage of the monthly rent, such as 5 percent.
If you still have questions about how to treat rental payments at tax time, consider discussing your situation with an experienced tax professional.
