Deductible Expenses

The costs to repair or maintain the property are deductible. Operating expenses, such as fees paid to a real estate management firm or to have the property cleaned between renters, are deductible as well. You may also deduct depreciation on the property. Depreciation can include both the original property and any subsequent improvements, but must begin the same year that the property is first offered for rent. Complete a Form 4562, "Depreciation and Amortization," to report any depreciation you claim.

Timing of Transactions

Unless you use the accrual method of accounting, you should recognize income and expenses as they occur. For income, this means when you receive payment for the rent, whether it is in cash or trade. Report expenses as you pay them. It does not matter whether you pay by check or credit card; the payment date will be the same.

Uncollected rents that you have not reported as income are not deductible. If you receive a payment for the cancellation of a lease, this is taxable income and is included for the year in which you received the payment. If you require a tenant to pay his first and last months' rent when he signs the lease, both rent payments are considered income when you receive the money rather than when you apply the money to rent due.

Security Deposits

If a security deposit is potentially refundable, do not count it as income when you receive it. When the lease ends, if the tenant forfeits all or part of his deposit due to damages or failure to comply with the lease terms, report the deposit as income at that point.

Expenses Exceeding Income

If you are renting a property that is not your primary home or a vacation home and incur expenses amounting to more than you received in gross income from the property, you may be able to apply some or all of the loss to other income. You must actively participate in the rental activities. The maximum allowable amounts are based on your adjusted gross income.