Tax_Research

Gross income is commonly defined as the amount of a company's or a person's income before all deductions or any taxpayer’s income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. Section 61 of the Internal Revenue Code (Code) defines "gross income" as "all income from whatever source derived. Generally, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Most individual taxpayers use the cash method. So, are improvements and additions to rental property paid for by lessee considered gross income' There are several types of rental income. The most common types of rental income are advance rent, canceling a lease, expenses paid by tenant, property or services, and security deposits. Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Example On March 18, 2009, you signed a 10-year lease to rent your property. During 2009, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. You must include $19,200 in your rental income in the first year. If your tenant pays you to cancel a lease, the amount you receive is rent. Include the payment in your income in the year you receive it regardless of your method of accounting. If your tenant pays any of your expenses, those payments are rental income. Because you are including this amount in income, you can also deduct the expenses if they are deductible rental expenses. Example While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. You can deduct the repair payment made by your tenant as a rental expense. If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Example Your tenant is a house painter. He offers to paint your rental property instead of paying 2 months' rent. You accept his offer. Include in your rental income the amount the tenant would have paid for 2 months' rent. You can deduct that same amount as a rental expense for painting your property. Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it. Rental income is defined as any payment you receive for the use of property. There are other types of income related to the renting of your property. These include: Lease with option to buy If the rental agreement gives the tenant the right to buy your rental property, the payments you receive under the agreement are considered rental income. If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Rental of property also used as a home If you rent property that you use as your home and you rent it fewer than 15 days during the tax year, you don't need to include the rent you receive in your income and you don't have to deduct rental expenses either. Part Interest If you own a part interest in rental property, you must report your part of the rental income from the property. Insurance Insurance proceeds for loss of rental income because of fire or other casualty are treated as rental income. If you are a cash basis taxpayer, you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account. If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. You generally deduct your expenses when you incur them, rather than when you pay them. Improvements to real property are generally developments of land or structures on property that do more than merely replace, repair or restore the original condition. Improvements are characterized as being permanent and adding to the value of the property. A usually permanent addition to or modification of real property that enhances its capital value and is distinguished from an ordinary repair in being designed to make the property more useful or valuable. If the lessee rents unimproved property and proceeds to make improvements to the property other than with payments or allowances, the lessee is entitled to depreciation for improvements when the cost is borne by the lessee. The cost of improvements however; may be treated as rent by the parties. If this is the case, then it is the lessor who is treated as making improvements. The cost is deductible as rent by the lessee and the lessor includes the cost in income as rental income. Whether the cost of improvements made by a lessee is treated as rent for tax purposes depends on the intent of the parties. This intent may be found in either the terms of the lease or the circumstances surrounding the lease and the making of the improvements. Reg. § 1.61-8(c) provides in part: When the cost of improvements made by a lessee may be credited against the rental obligation of the lessee, the cost of improvements is treated as rent. Similarly, work performed by a tenant under an abatement agreement was additional rental income to the lessor since it was the intent of the parties to treat the improvements as a substitute for rent. Also, when the lease permitted the tenant to make improvements and to reduce the amount of the stated rent by the cost of the improvements, the cost of the improvements was treated as rent and the tenant was treated as having made no investments in the improvements. The entire cost of the improvement was deductible by the tenant as rent. Generally, the cost of the improvements is the amount of rental income realized by the lessor and the amount of rent deemed paid by the lessee when improvements are treated as rent. In conclusion, whether improvements and additions are considered as gross income depends on if it was done in lieu of rent and the intent of the parties. This determination is based on the situation, the rental rate, and the terms of the rental agreement. So, the solution to the tax research problem 3-65 is quite simple. William must include a $1,000 in gross income. Since, the wiring costing about $ 4000 did increase the value of the building and William agreed to only forgo one month’s rent of $ 1,000.