607.82 Rental Income

 

A. Definition

 

The following definitions are applicable to rental income.

 

Term Definition

Rent

A payment that an individual receives for the use of real or personal property, such as land, housing or machinery.

Net rental income

Gross rent less the ordinary and necessary expense paid in the same taxable year.

Ordinary and necessary expenses

Expenses necessary for the production or collection of rental income. In general, these expense include:

  • Interest on debts;

  • State and local taxes on real and personal property and on motor fuel;

  • General sales taxes; and

  • Expenses of managing or maintaining property.

Note: See D below for more specific example of deductible expenses.

 

IF rental income is...

THEN the ACE income type is...

Unearned income

Rental Income

Earned income

Self Employment

 


 

B. Category

 

Net rental income can be either earned or unearned.

 

Earned Rental income is considered self-employment income when the individual is in the business of renting properties.
Unearned Rental income is considered unearned income when the individual is not in the business of renting properties.

 


 

C. Treatment

 

Counted for all programs

 


 

D. Expenses

 

Deduct the following expenses from the gross income (both earned and unearned):

 

Note: Deduct expenses when paid, not when incurred.

 


 

E. Prorating Expenses

 

Prorate the portion of expenses that is designated for the portion of the rental property that is rented.

 

Scenario

Example

Multiple Residences

The customer owns a four-unit apartment building. She lives in one unit and rents the other three. Deduct three quarters of the allowable expenses from the gross rental income.

Rooms for Rent

The customer rents one bedroom out of her six-room house. Deduct one-sixth of the allowable expenses from the gross rental income.

Acreage

The customer rents one acre of the five acres of land she owns. Deduct one fifth of the allowable expenses from the gross rental income.

 


 

F. Proof

 

Verify both income and expenses. Expenses must be verified before deducting from the gross income. Types of proof include, but are not limited to the following.

 

Earned Income

Federal income tax returns - Form 1040, Schedule C or C-EZ and Schedule SE, or Schedule E (Do not use tax forms from other countries)

 

If...

Then...

You receive the tax return and statement that the amount of income remains the same

Use them as proof of income and expenses claimed

You receive the itemized ledger

Use it as proof of income and expenses. Deduct only allowable expenses. Request copies of receipts, bills, etc. to verify expenses.

The self-employed individual does not file a tax return or maintain an itemized ledger

Accept the self-employed person’s written statement as to the amount of gross income. However, you must verify allowable expenses before deducting them from the gross income.

 

Unearned Income

Expenses

 


 

G. Calculating Net Rental Income

 

Follow the procedures below to calculate net rental income.

 

Step

Action

1

Determine the gross monthly income for the month.

IF using...

THEN...

The Federal income tax return

Divide the gross amount on the tax return by the number of months the individual was in business that year.

A record, journal, or financial statement

Total the income for the month.

Other document

Contact the Policy Unit.

 

2

Deduct allowable expenses (see D above) paid in a control date from gross rental income received in the same control date.

If expenses… THEN…

Do not exceed gross rental income received in a control date

Deduct the entire expense from the gross income receive in that month

Exceed gross rental income received in a control date

  • Deduct the excess expenses from the gross income for the following month of the same tax year.

  • Continue deducting excess expenses from gross rental income for subsequent months until the end of the taxable year.

Note: Excess expenses remaining at the end of the taxable year cannot be carried over to the next taxable year and must be disregarded. Never reduce net rental income below zero or carry over excess expenses to the next taxable year.

 

 


 

H. ALTCS SOC

 

Incidental repairs and other rental expenses that are not paid on a monthly basis change the amount of rental income counted in the Share of Cost calculation.

 

For an active case, process a Share of Cost adjustment when a rental expense paid in the current month or a past month reduces the countable rental income for that month.

 


 

I. Determining the Countable Income

 

Review the individual’s Schedule SE or Schedule E (whichever is filed with the 1040) for the previous year or the ledger, journal or financial statement for the control date to determine the gross monthly income. See the descriptions below.

 


 

J. Schedule E

 

The following is a description of the most common fields on the Schedule E.

 

Line #

Description

1

Address of rental property.

3

Countable self-employment rental income.

4

Countable self-employment rental income.

19

Allowable rental expenses.

 


 

K. Schedule SE

 

The self-employed person may use the short or long version of the Schedule SE. Do not use the Schedule SE as verification of income. Use the Schedule C, C-EZ, or E to determine the countable self-employment income.