Income from rental property owned by a client is earned income if the client is actively engaged in management of the property.
Deduct reasonable and necessary expenses of rental property which are incurred in the production of income.
Determine the net earned income from rental by subtracting the expenses of rental from the gross income. Expenses include, but are not limited to:
- utility expenses paid by the landlord,
- insurance, and
- mortgage payments (principal and interest).
When the client and the tenant(s) occupy the same building, the expenses of rental may not be easy to divide because the expenses are not billed separately. When expenses are not billed separately, base the expenses on the percentage of the number of
rooms occupied by the tenant(s) compared to the total number of rooms in the building. For example, if the tenant(s) occupies 5 rooms and there are 12 rooms in the building, the expenses of rental are 5/12 of the total expenses.
NOTE: When a client has responsibility for cleaning a room and providing clean linens, the income is earned income from a roomer rather than earned income from rental.