Tax Preparer Guide to 1040 Chapter 7 Rental Income and Expenses

Question 1

Rental Income

Answer 1

Is any payment received for the use or occupancy of property. Rental payments are included in a cash-basis taxpayer’s income when actually or constructively received.

Question 2

Advance Rents

Answer 2

Are rental payments made before the rent is due. An example of advance rents would be a payment at the beginning of a lease of the first and final month’s rent. Advance rents are included in gross income unless they are treated as security deposits. However, once the landlord has the right to retain the security deposit, it is included in gross income.

Question 3

Security Deposit

Answer 3

Is an amount left with the landlord to cover damage to the property or nonpayment of rent that may have to be returned to the tenant at the end of the lease, It does not represent a prepayment of rent.

Question 4

Mortgage Interest

Answer 4

Mortgage interest paid on rental property that is not the taxpayer’s is deductible. There is no limit to the size of the mortgage on rental property. Mortgage interest on a personal residence that is partially rented out must be allocated between rental and personal portions.

Question 5

Insurance

Answer 5

Insurance premiums paid on rental property are fully deductible. However, if a taxpayer rents part of his or her home out, only the portion that is allocated to the rental is deductible. Insurance premiums paid 12 months in advance are deductible in the year to which they apply. In other words, they are not fully deductible in the year they were paid.

Question 6

Depreciation Definition

Answer 6

Is an expense reflecting the normal use and decline in value of an asset over time. It is the method for recovering the cost of income producing property through periodic tax deductions. Depreciation begins when the item is considered placed in service or when the property is ready and available for use in a business or income producing activity.

Question 7

Depreciation Expense

Answer 7

is determined based on the property’s basis, recovery period, and the depreciation method used. Depreciation deductions are allowed only on the part of the property that is used for rental purposes. Owners claiming depreciation deductions, may need to file Form 4562 Depreciation and Amortization `

Question 8

Capitalization

Answer 8

Adding costs, such

as improvements, to the basis of assets.

Question 9

Amortization

Answer 9

A ratable deduction
for the cost of certain intangible
property over the period specified
by law. Examples of costs that can
be amortized are goodwill, agreement not to compete, and research
and mining exploration costs.

Question 10

Capitalizing a cost

Answer 10

Means adding it to the basis of the property. A capitalized cost can be recovered through depreciation in some instances. Otherwise, a capitalized cost reduces gain or increases loss when the property is sold.