Income derived from a rental property is taxable. If you own a rental property, the rental income obtained should be declared in your income tax return form.
Bear in mind that not all monetary transaction between the house owner & tenant is taxable. Also remember that certain expenses on the rental property are eligible for deduction to reduce the income tax.
Take a look at the following scenario.
1. Security deposits
Security deposits are not taxable if the house owner intend to return the money to the tenant at the end of the lease.
However, if the tenant breaches his lease terms, house owners are entitled to use the deposit for repair purpose and return the balance back to the tenant.
House owner must include the amount used to repair as income and at the same time claim the amount spent as a deductible expense.
2. Advanced Rental
Advanced rental is taxable even it is not due. It is taxable in the year when money is received.
3. Expenses Paid by Tenant
Any expenses on repair made by tenant related to the property is consider as income to the house owner. House owner can then deduct the repair payment as a rental expense.
4. Trade for Services
If tenant offers services in the exchange for rent, the fair market value of his services is taxable.
Tax deduction on rental property.
1. Property Repairs and Improvements
Repair to keep the property in good condition is consider as expenses and house owners are eligible for deduction.
On the other hand, expenses on property improvements, such as new garage are not deductible because it will add values to the property.
2. Mortgage and Other Expenses
All expenses incurred in order to obtain a mortgage are not deductible. These includes commissions and legal fees.
However, interest from mortgage, cost of insurance and quit rent are deductible.
3. Rental as a Business
In its public ruling, Inland Revenue Board (IRB) states that “Where in conjunction with the letting of a property, a person also provides ancillary or support services/facilities, the letting can be considered a business source of income …”
It means that, the house owner entitle to claim “capital allowances” on any plant and machinery used in the business of letting. These could include air conditioners, refrigerators as well as furniture and fittings.
If the tax-deductible expenses in any one year exceed the rental income, then the excess being a business loss can be carried forward.