TAXES > Individuals > Gross Income > Rentals and Royalties (Schedule E)

Rents and Royalties

Rent is the payment for the use of real or tangible personal property. Royalties are payments for the use of certain rights, e.g., intangible rights such as patents. Both are includible in gross income.

Rents are includible in gross income, whether paid in cash or property. If paid in property, the property's fair market value (at receipt) is the amount taxed as rent. Rents are reported by cash basis taxpayers when received, and by accrual basis taxpayers when due unless they are considered uncollectible. An advance rental is currently taxable even if it is refundable or can be applied against the property's purchase price. But a security deposit is not taxable rent. Where the rules on deferred payment leases over $250,000 apply, the lessor has a "constant accrual" of rental income in the same way that rental expenses are deductible by the lessee. Where a tenant is required under the lease to pay interest, property taxes, mortgage principal, etc., thus satisfying the landlord's own payment obligation, the payments are treated as rent paid by the tenant to the landlord.

Royalties (payments for the use of copyrights, patents, trademarks, secret processes and similar intangibles, and for the right to exploit mineral or other natural resources) are taxable as ordinary income, regardless of the name given to them by the parties or the form of payment (e.g., lump sum or property such as stock). Royalties are included by cash basis taxpayers on receipt (actual or constructive), and by accrual basis taxpayers when their rights to them are fixed.

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