Business Income, Rental Income, Tips & Advice

Choosing An Accounting Method for Rental Income

After you determine whether the income from your rental property is rental income or business income, the next step is to make sure that you are taking all of your rental income into account.

Ensure you’re declaring all your rental income

Obviously, the rent that you receive in cash, cheque or money transfer is considered rental income. But if your tenant is paying all or some of his rent with services or in-kind (giving you goods or commodities instead of money) you need to “translate” the value of those services or things you have been given into monetary terms by figuring out their Fair Market Value (FMV).

The FMV is the highest price that property or service would bring in an open and unrestricted market, between a willing buyer and a willing seller who are acting independently of each other.

You will record the amounts that your tenant has paid you in cash or cheque in the “Gross rents” column on the Form T776 – Statement of Real Estate Rentals.

The fair market value amounts that you have calculated get reported as “Other related income”.

Other Related Income

Other Related Income is also where you record rental income you receive from premiums and leases such as:

  • granting or extending a lease or sublease;
  • permitting a sublease; or
  • cancelling a lease or sublease.

Don’t forget to include any income you received from sharecropping, either by renting farmland or as a share of the crop.

Accounting Methods

You report your rental income based on the calendar year, from January 1st to December 31st, no matter when you purchased or rented out a particular property. There are two methods that you can use to account for your rental income: the accrual method or the cash method.

Accrual vs. Cash Methods of Accounting

To account for your rental income using the accrual method you:

  • Include the rent as income for the year in which it is due, whether or not you receive it in that year. For example, your tenant pays you in December for January and February rent, that income is not included until the following year.
  • Deduct your expenses in the year you incur them, no matter when you pay them.

While to account for your rental income using the cash method you:

  • Include and claim rents as income in the year you receive them; and
  • Deduct expenses in the year you pay them.

Before you choose which method you are going to use, you need to know that you can only use the cash method if you have no expenses outstanding at the end of the year and only if your net rental income or loss would be practically the same if you were using the accrual method.

You will also want to know that the accrual method of accounting is the type that most businesses and professionals are required to use by law, so if there is any question of the income from your rental property being classed as business income.

Gross and Net Rental Income

Now that you’ve figured out which method you are using, enter the income as your total “Gross Rental Income” on the T776 – Statement of Real Estate Rentals form, which will then transfer on Line 12599 – Gross Rental Income of your income tax return. After deducting the expenses from the gross income using the T776 form, you will reach the “net rental income” amount, which you report on Line 12600 – Net Rental Income of your tax return.

TurboTax Premier offers an easy step-by-step process to claim your rental income and expenses. The software helps you fill the T776 form schedule 3 with your income tax return. Consider TurboTax Live Assist & Review if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.

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