Rule: The basic formula for determination of net rental income or loss
follows:
Gross rental income
Prepaid rental income
Rent cancellation payments
Improvements in lieu of rent
(Rental expenses)
Net rental income (loss)
If security deposits are held separately and not available to be applied to
last month's rent (as in a segregated account), they are a liability of the
taxpayer and not included in income in the year received.
Choice "d" is correct. The calculation of gross income for the year
follows:
Current rents
$ 30,000
Advance rents for the next year
10,000
Security deposits held in a segregated account
−
Lease cancellation payments
15,000
Gross income from the rental activity
$ 55,000
Choice "c" is incorrect. This answer option incorrectly includes only the
current rents as part of gross income, when advance rents and lease cancellation
payments also must be included.
Choice "b" is incorrect. This answer option incorrectly includes only the
current rents and the advance rents as part of gross income, when lease
cancellation payments also must be included.
Choice "a" is incorrect. This answer option incorrectly includes all of the
payments collected for the rental activity in the year, when the security
deposits that are held in a segregated account are excluded from gross income.
