Which scenario requires rental income to be reported in the following tax year?

In the scenario where rental income must be reported in the following tax year, it is essential to understand the principles of income recognition under the cash basis of accounting, which is typically used by individual taxpayers who report rental income. According to the cash basis method, income is recognized when it is actually or constructively received.

In this case, if a check for rental income was received but had insufficient funds, the landlord has not effectively received that income. The funds are not available for use, and the income cannot be realized until the check is honored. Therefore, this income does not meet the criteria for recognition in the current tax year and must be reported the next year when the funds are made available.

In contrast, if a check was received but not cashed until the next year, it would generally still be considered income for the year it was received because the taxpayer was able to access the funds even if they chose to wait to cash it. Delays in postal delivery or a check that is never cashed also don’t impact the recognition of income in the same way—postal delays still result in a check being received within the tax year, and a check never cashed typically means the income should be recognized in the year the check was issued or received