Rental income is any payment you receive for the use or occupation of property, and it is not limited to the monthly rent check. IRS Publication 527 (2025) counts advance rent, lease cancellation payments, bills a tenant pays for you and the value of services a tenant provides instead of rent, all in the year you receive them. A security deposit is not income when you receive it if you plan to return it, but any part you keep, or a "deposit" that is really last month's rent, is.

The short version

  • Pub 527: "Rental income is any payment you receive for the use or occupation of property."
  • Most individual owners use the cash method and report rent when it is actually or constructively received, which includes amounts credited to your bank account.
  • Advance rent is income in the year you receive it, whatever period it covers and whatever accounting method you use.
  • A refundable security deposit is not income on receipt. Amounts you keep because the tenant did not live up to the lease terms are income in the year you keep them.
  • If a tenant pays one of your expenses, the payment is rent, and you may deduct the expense if it is a deductible rental expense.
  • A property manager reports the rent it paid over to you on Form 1099-MISC, but you must report all rental income whether or not a form arrives.

Payment by payment

PaymentIs it rental income?Timing or note (Pub 527, 2025)
Regular rentYesWhen received (cash method)
Advance rentYesThe year received, whatever period it covers
Security deposit you plan to returnNoNot on receipt
Part of a deposit you keep for a lease breachYesThe year you keep it
"Security deposit" to be used as final rentYes, it is advance rentWhen received
Payment from a tenant to cancel the leaseYesThe year received, regardless of method
Your bills paid by the tenantYesYou may deduct the bill if it is a deductible rental expense
Property or services instead of rentYes, at fair market valueAn agreed price is the fair market value unless there is evidence otherwise
Payments under a lease with an option to buyGenerally yesSee below if the option is exercised

Advance rent and lease cancellation

Advance rent is "any amount you receive before the period that it covers." Pub 527 says to include it in income in the year you receive it, regardless of the period covered or your accounting method.

Pub 527's own example: on a 10-year lease signed March 18, 2025, the owner received $9,600 for the first year and $9,600 for the last year during 2025, and must include $19,200 in 2025 income.

A payment from a tenant to cancel a lease is also rent. Include it in the year you receive it, regardless of your accounting method.

Security deposits

Pub 527 sets three rules for deposits:

  1. Refundable deposit. Don't include it in income when you receive it if you plan to return it at the end of the lease.
  2. Deposit you keep. If you keep part or all of it during any year because the tenant doesn't live up to the lease, include the amount you keep in that year's income.
  3. Deposit that is really rent. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it when you receive it.

How much may be collected, and how and when it must be returned, is a California landlord-tenant question, not a tax one. See California security deposit rules and the deposit return deadline calculator. For tax purposes, keep a dated record of each deduction from a deposit, because the amount kept is what becomes income.

Tenant-paid expenses, services and other payments

  • Expenses paid by the tenant. "If your tenant pays any of your expenses, those payments are rental income." Pub 527 gives two examples: a tenant pays the water and sewage bill, or pays for a furnace repair and deducts it from rent. In each case the amount is income, and the owner can deduct the bill as a rental expense.
  • Property or services instead of rent. Include the fair market value of the property or services. If the services are provided at an agreed price, that price is the fair market value unless there is evidence to the contrary. In Pub 527's example, a tenant who is a house painter paints the property instead of paying 2 months' rent; the owner includes the 2 months' rent as income and can deduct the same amount as a painting expense.
  • Lease with an option to buy. Payments are generally rental income. If the tenant exercises the option, payments for the period after the sale date are part of the selling price.
  • Part interest. If you own part of the property, report your share of the rent and deduct expenses according to your percentage of ownership.
  • A home rented fewer than 15 days. If the property is also used as your home and rented for less than 15 days in the year, don't include the rent in income (and don't deduct rental expenses). The rules are in Schedule E for rental property.

Forms 1099-MISC and 1099-K

A tenant who pays rent to a real estate agent or property manager does not have to report it. The agent or manager, however, "must use Form 1099-MISC to report the rent paid over to the property owner." The reporting threshold depends on when the rent was paid:

Rent paid over inForm 1099-MISC box 1 threshold
2025$600 or more
2026$2,000 or more

If you collect rent through a payment app or online marketplace, Form 1099-K is required only when payments total over $20,000 in more than 200 transactions, though a platform may send one for lower amounts. The IRS lists "getting repaid by a roommate for rent" as a personal payment, not a payment for goods or services.

Whatever forms you do or do not receive, the IRS is clear: you must report all income on your return. More on who sends and receives these forms is in 1099 forms for landlords.

California differences

California-source income includes rent from California property, and the FTB says that applies even when no tax was withheld: income from real property located in California "is California source income and is subject to California tax." For an owner who lives out of state:

  • A nonresident files Form 540NR and pays California tax on California-source income, including rent from the California property.
  • Tenants who pay a nonresident owner directly do not withhold, but payments from a property management company are subject to 7% withholding, optional on the first $1,500 paid in a calendar year, with the management fee deducted first. See California's 7% withholding on rent.
  • Military owners stationed or domiciled elsewhere should read California taxes for military homeowners.

What to do next

  1. List every payment connected to the rental for the year, not only monthly rent: fees, cancellation payments, deposits kept, bills the tenant paid.
  2. Keep deposit records separate from rent, with a dated note of any amount kept and why.
  3. Write down any services accepted instead of rent and the agreed price.
  4. Match your records to any Form 1099-MISC or 1099-K you receive, and report all rental income either way.
  5. Ask your CPA how a deposit applied to final rent or a lease buyout should be reported for your facts.

You can model rent and costs with the rental cash flow calculator.

Frequently asked questions

Is last month's rent collected at move-in taxable right away?

Yes, under Pub 527. Rent received before the period it covers is advance rent and is included in income in the year you receive it, whatever period it covers and whichever accounting method you use. An amount called a security deposit that is to be used as a final payment of rent is treated the same way.

When does a security deposit become income?

A deposit you plan to return is not income when you receive it. If you keep part or all of it during a year because the tenant did not meet the lease terms, the amount you keep is income in that year. Keeping a dated, itemized record of each deduction makes the reporting simpler.

My tenant paid a repair bill and took it off the rent. How do I report that?

Pub 527 treats the amount the tenant paid as rental income, and you can deduct the repair as a rental expense if it is deductible. In practice you report the full rent as income and the repair as an expense, rather than reporting only the reduced rent you received.

Do I report rent that was not on a Form 1099?

Yes. The IRS says that no matter the amount of reported payments, you must report all income on your tax return. A Form 1099-MISC from a manager or a Form 1099-K from a payment platform is a cross-check, not the measure of what you owe tax on.

Did the 1099-K threshold drop to $600?

No. A 2025 federal law restored the $20,000 and 200-transaction threshold for payment apps and online marketplaces as if the lower threshold had never taken effect. A platform may still send a Form 1099-K for smaller amounts.

This is general information, not tax or legal advice. Tax rules change and depend on your facts; talk to a CPA or enrolled agent before acting.

McKee Properties manages rentals from its Coronado office; contact us with questions about your property.

Sources

Verified October 19, 2026.

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