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Ah yes, it is getting closer; the dreaded 4/15 IRS deadline!  If you have an investment property, your taxes can be a little tricky.  Obviously you or your accountant will deduct all of your property costs from your gross rental property income to determine your tax liability.  But there are a few gotchas that can arise for the uninformed.  What follows are some simple tips to keep in mind.  This information came directly from the IRS on 3/4/11.

Property Expenses

First, any and all rental property expenses are deductible so make sure you keep comprehensive records of everything.  This includes repairs, property maintenance, landlord insurance, property taxes, mortgage interest, mileage going to and from your properties, etc.  If your tenant pays any of your expenses directly, you must count this as income, however you may be able to count these items as deductable expenses as well.  See Rental Expenses in IRS Publication 527 for more info about this particular situation.

Property Income

Second, your rental income must be included on the tax return for the year it was received.  This includes advance rent.  For example, if your tenant pays you an extra $600 in December 2010 to cover his January 2011 rent, you must add this $600 payment to your 2010 rental income amount.   If you receive merchandise or a service from the tenant in lieu of rent, you must factor the fair market value of these items into your income calculation. 

Security Deposits

Third, any security deposits you have are generally not factored in to your tax calculation.  The only exception to this is if you deduct any portion of a tenant’s deposit when they move out.  For example, if they move out without paying the final month’s rent, you can deduct the unpaid balance from their deposit but you must report it as income.

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