LAURENE H. YOUNG, RMP, REALTOR
Lui & Young Realty, Inc.
2011 President, Oahu Chapter
National Association of Residential Property Managers
Q. I’m not sure what I have to declare as rental income on my taxes? What if my tenant does work for me in lieu of rent? What if I want to rent out a room in my house to someone who would provide services for me. They would do shopping for me, pay the utilities, drive me to doctor’s appointments, and do minor repairs. Do I still have to pay taxes when no money changed hands? What about the security deposit money?
A. You have a lot of questions about taxes. I will try to answer them generally, but there are so many tax laws, I highly suggest you check with your tax professional about your specific circumstance.
You have to declare, as rental income, the fair market value of the property paid for and services provided for you by your tenant. If your tenant paints your house or does repairs in lieu of rent, you must first include the value of those services in your rental income and then deduct it as an expense on your tax return. If your tenant pays any of your rental expenses, such as paying the repair person directly for repairing a leaking faucet, and then deducts it from the rent due, you would report the net rent paid plus the cost of the repair as rental income, and then deduct the repair expense on your tax return.
You have to pay the general excise tax based on your gross rental income. Even though your property manager charges you a fee, you must declare the gross rent (before the fees) on your taxes, not the net after their fees. The management fee would then be deductible. If a tenant decides not to move in and pays you a cancellation fee, that fee must be declared as income. Application fees are also income.
You do not have to pay income or general excise tax on the security deposit if you plan to return it to the tenant at the end of the lease. If your tenant leaves and you keep part of the security deposit, you must declare the money retained as income.
Some common rental expenses that can be deducted on your tax return are advertising, maintenance and repairs, cleaning, insurance, management fees, legal fees, interest and depreciation. You cannot deduct the value of your own labor for your property. Lost rental income is usually not deductible.
Some people rent out rooms in their personal residence and can’t figure out what is deductible and what to report as income. Tenant services, such as shopping for you, driving you to the doctor, or other similar personal services provided for you in lieu of rent usually cannot be deducted. However the value of the services provided is taxable to you as rental income. You can ask the tenant to pay the utilities and maintenance fee in lieu of rent, but the value of the payments is considered rental income and must be reported. You would be able to deduct only that portion of the utilities and maintenance fee that is attributable to your tenant’s usage. Landlords can use any reasonable method for calculating what portion is attributable to the rental. Square footage is a common method.
In short, you cannot circumvent the law by saying that “no money changed hands.” Check with your tax professional about what you have to declare as income and what is deductible.
Answers to questions in Landlord Tenant Q&A are provided by members of the Oahu Chapter of the National Association of Residential Property Managers (NARPM), an organization that supports the professional and ethical practices of rental home management through networking, education, and certification. The Oahu Chapter, founded in 2004, has become the largest in the nation with 175 registered members. Disclaimer: The answers provided in this column by Realtors address individual cases and should not be construed as interpretations of the law. For specific information on Hawaii State Law, go to http:// hawaii.gov/ dcca/areas/ocp/ landlord_tenant or contact an attorney.