Maria was living in her own condo for several years before she married Joe and moved to live in his apartment.  Last week she came to my office and told me about her move and how beneficial it was to rent out the property back in the States. As she believed renting was a good way to maintain the home while offsetting the monthly mortgage payments she was making on the property.

She was curious to know the tax implications and like many first-time landlords she had the following questions:

  • Is rental income taxable?
  • When do I need to pay taxes on rental income?
  • Are security deposits taxable?
  • What expenses can I deduct?
  • Where is rental income and expenses reported on form 1040?
  • Is there any passive activity rule that might apply?


Is rental income taxable?

Rental income is taxable but you are allowed to reduce your rental income by subtracting expenses that you incur to get your property ready to rent, and then to maintain it as a rental.


When do I owe taxes on rental income?

It is important to note that you should report rental income when you actually or constructively receive it. For example, if your renter place their January 2015 checks in your mailbox on December 28th 2015, you cannot avoid reporting the rent as 2015 income by simply leaving the check in your mailbox until January 2015.


Are security deposits taxable?

Security deposits are not included in income when you receive them if you plan to return them to your tenants at the end of the lease. If the deposit it non refundable on the other hand, you must report it as income when you receive it.


What expenses can I deduct?

Cost incurred to place the property in service, manage and maintain it is deductible. The costs should be ordinary and necessary. Some of the common deductible expenses are:

  • Advertising
  • Cleaning and maintenance
  • Commissions
  • Depreciation
  • Interest Expense
  • Management Fees
  • Repairs
  • Supplies
  • Utilities

Please note:  always differentiate between improvements and repairs. Improvements that materially add value to property are capitalized like additions to structure, modernizing a kitchen etc. Whereas repairs are taken as a deductible expense.


Where is rental income and expenses reported on 1040?

Rental income and expenses are reported on Schedule E: Supplemental Income and Loss. The total income or loss computed on Schedule E carries to page 1 of your Form 1040.


Is there any passive activity rule that might apply?

Rental properties are considered as passive activities and are thus subject to passive activity loss rules which are a little complex to understand. In general the passive activity rule offset the use of other type of income to set off passive losses. But there is an exception to thus rule: if you actively participate in rental activity, you can deduct $25,000 of your loss. To actively To actively participate means that you own at least 10% of the property, and you make major management decisions, such as approving new tenants, setting rental terms etc.

But there is a phase out limit involved. If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000. The exception is completely phased out when your modified adjusted gross income reaches $150,000.


About US Tax Practice GmbH: US Tax Practice offers U.S. tax services in Switzerland. It is the go-to tax preparation service and compliance practice for U.S. tax payers. Located in Lenzburg, Switzerland, the company was founded by Patrick Evans, a U.S. tax accountant (CPA, CGMA) and U.S. citizen determined to work with his clients’ best interests in mind. US Tax Practice GmbH services include U.S. Income Tax Preparation, U.S. Tax Compliance, Foreign Bank Account Reporting (FBAR), Tax Planning and Optimization, and Expatriation.