Hyden, Miron & Foster, PLLC Law Blog

Monday, August 3, 2015

Common Rental Property Income Mistakes

By: Carrie Bumgardner

Entering the rental property market is a common way to increase your net worth as well as generate some passive income. If you are new to the landlord business, you may fall prey to some common income mistakes when you file your tax return. Knowing the most common mistakes is a good place to start.

1. Not declaring rent when it is received. Any rent received by a landlord must be declared in the year it is received. It is common to require a deposit and last month's rent. Even though the last month's rent is not due yet it must be declared when received.

2. Security deposits count as income if not returned. However, you may also have corresponding expenses if the funds are used to complete repairs.

3. Expenses paid by a tenant are income to the landlord. If your tenant fixes something on the property, the money spent by the tenant is income if the cost of the repair is deducted off the rent. Again, you may also have a corresponding deduction for the cost of the repairs.

4. Property and furnishings are depreciated differently. For property that is rented “furnished,” you may deduct the cost of the furnishings. Residential rental property is depreciated over 27½ years while furniture is depreciated over five (5) years.

5. Failing to document. Everything from your original lease agreement to the cost of replacing a lightbulb should be documented in writing. Not only does this ensure you will get credit for all your allowable deductions but is also protects you in the event of an Internal Revenue Service audit.

By avoiding these common mistakes you can dramatically reduce the chances of an error on your tax return. The best way to avoid these pitfalls is to have your return prepared by a tax professional.

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