Investing in rental properties is a good financial move when real estate prices drop and you have the extra money to invest. Rental properties can provide a good return on investment over time in rental profit, as well as on the sale of the property when real estate prices improve. Calculating rental profit may seem as simple as adding together what you received for rent and subtracting your expenses, but the Internal Revenue Service (IRS) provides documentation that spells out the method that rental property income and expense must be accounted for and reported on your federal tax filing.
Add all monthly rental payments received for the rental property together to obtain an annual gross rental income amount. Do not include security deposits as income.
Add all expenses paid for the rental property together to determine total expenses for the rental. Expenses may include items such as repairs, maintenance, advertising, credit checks, interest paid on mortgage and property taxes paid.
Calculate depreciation on the home. The IRS does not consider principal payments on the loan an expense, but you can depreciate your basis in the home over a period of 27.5 years. You also must calculate depreciation on any repairs or equipment added to the home that increases the home’s value or adds additional life to the home, such as a new stove or a new roof. Refer to IRS Publication 946 for the tax rules and methods of calculating depreciation.
Subtract the total expenses paid and the depreciation allowed from the total rental payments received to arrive at net rental income.
If you are not certain how to properly account for rental property profit, then consider hiring an accounting professional to assist you with identifying expenses and preparing your tax return.
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