There are a large number of details about rental income comprising some of the knowledge required to become a tax preparer. Absorbing this vast volume of information begins with learning some basics about the subject.
Essentially, taxable income from rental activity consists of gross rents received less expenses incurred to maintain and lease the property. Taxpayers are often confused by the application of the cash basis method of accounting. This means that tax preparer jobs involve assuring that income is reported for the year it is actually received and expenses are recorded in the year actually paid. Therefore, for example, insurance paid by a normal cash basis taxpayer is deductible in the year paid regardless of the future periods that the premium payment covers.
In addition, income tax course training for tax preparers reveals that advance payments of rent by tenants are taxable for the landlord in the year received. This is true even for rent intended for application to a final month of a lease in a future year. The element that matters in recording rent income is the date payment is received, not the period covered by a payment.
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The tax impact of security deposits is another matter that confuses some taxpayers. A Registered Tax Return Preparer is responsible for conducting inquires about payments constituting security deposits rather than rent. A security deposit is not income when paid because the landlord expects to return it to the tenant at the end of the lease. However, any part of a security deposit that is kept when the lease terminates is then counted as income in the termination year.
The tax preparer exam addresses other situations when an amount is counted as rent income. This includes circumstances when a tenant pays for an expense that is the landlord’s responsibility and deducts the expenditure from a rental payment. In such cases, the gross rent includes the expense paid by the tenant. The expense is then accounted for as a tax-deductible item of the landlord that offsets the gross rent to calculate taxable rental income.
The same principle applies to any services provided by a tenant. The fair market value of services or property provided is included in rental income. For example, if a tenant repairs a fence on the landlord’s property, the value of materials and labor supplied by the tenant are counted as rental income of the landlord.
Lastly, a RTRP must become familiar with the special rules that apply to rental property that is also personally used by the owner. These situations require a division of expenses for allocation to separate rental and personal use accounting.
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