Renting out your house can open up a new stream of income and tax breaks but it also adds another layer of responsibility. You’ll need to stay on top of repairs, maintenance and rent collection. While that sounds like a lot there is really a clear path forward for you to get a good grasp on being a landlord and making sure your interests are best protected. Because of the complex tax laws facing landlords, it would also behoove you to work with a financial advisor to boost your chances of enjoying tax cuts and making a profit out of this business venture.
Can You Be a Landlord?
While it may sound lucrative to rent out your house or a portion of it, the extra money may not be worth the time and stress. You’d need to market your home and screen tenants as thoroughly as possible. You’d also need to handle repairs and maintenance or hire the right professionals to do it. On top of that, there’s always the chance that your tenants will not pay their rent, which can become a whole other headache if you have to evict them.
If you can deal with the risk of being a landlord then it’s not that difficult to move forward and actually rent out your home. That’s the toughest part because it can hurt you financially if you don’t protect your interests in your property and make sure that you set your whole process up to succeed. There are several things to take into consideration before getting started with this new investment.
How to Market Your Rental Home
In order to attract the right tenants, you’re going to need your sales skills to promote it. So take a good look at your home and take note of what makes it stand out. Does it have appliances like washers and dryers? Or are the floors hardwood? Make sure you make this clear in your listings. You can highlight the following if applicable in order to attract potential tenants:
- Stainless steel
- Vaulted ceilings
With that said, prepare your home for the new tenant. Make sure it’s as clean as it can be. And make sure everything works. As you examine how rental income could play into your whole financial picture, don’t be deterred by the expenses you may incur in terms of financial advisor costs and make sure you are getting the expert advice you need.
Know Landlord Laws
Tenants have rights, such as the right to privacy and not being disturbed, and you have to respect them. There are also local zoning laws, state laws and federal laws that you need to abide by. For instance, at the federal level, you must disclose any lead-based paint hazards to tenants. The Fair Housing Act and the Fair Credit Reporting Act require that you get permission before running a credit check, It also says that you must disclose which reporting agency you used and whether anything in the person’s credit report led to your turning them down.
You should read up on all the laws before even listing your house. Websites like Nolo provide information about landlord laws and rules. But to make sure you cover everything, your best bet is to consult a local real estate lawyer. The lawyer can also help you draw up a lease, which is another legal requirement.
Get Landlord Insurance
Landlord insurance typically breaks down into two categories: property and liability protection. Both are designed to protect you from financial losses. Most property insurance policies would cover you in the event the home falls victim to the elements like fire, lightning and wind.
Liability protection would cover you in case a tenant gets hurt. For instance, if your tenant falls down the stairs and the court determines you were remiss in not properly maintaining those stairs, you could be held responsible for the medical bills. Based on your policy, your insurance may cover it. You usually don’t pay a deductible for a liability claim.
But depending on the area where your rental home is, you may want to take out additional policies to cover vandalism, burglary and other potential threats. You may want to consult an Accredited Advisor in Insurance (AAI).
Screen Potential Tenants
This is probably one of the most important tasks you’d cover as a new landlord. You’ll have to find reliable people who will pay the rent and not bring down the house. A good way to start vetting a potential tenant is to check his or her credit history.
You can acquire a credit report from one of the major agencies such as Equifax, Experian or TransUnion. Just make sure you follow the rules under the Fair Credit Reporting Act. In addition, you can check public records to find out your potential tenant’s criminal record if any. You can also visit Landlord.com for tips on screening tenants.
Figure Out How Much Rent to Charge
You have to be competitive with setting your rent. You can start by checking what comparably sized rentals are going for in your neighborhood. But make sure it’s fair for what you have. It’s fine to aim higher if you have specific amenities like a washer and dryer. It’s important that you don’t overprice your home so take the demand in your market into account before putting it out on the market. If you see similar homes going quickly at a certain price then you may want to try yours at a bit more.
Take Landlord Tax Deductions
As a landlord, you may qualify for some rental property deductions. For starters, you can deduct interest paid on the mortgage or other type of loan you took out to acquire or improve the property. So you may be interested in a home improvement loan. Or you can take out a home equity line of credit (HELOC) to fund a few repairs that can boost the value of your house.
In addition, you can deduct credit card interest that you’ve paid in relation to rental activity. Generally speaking, you can deduct most rental activity expenses from the income you earn from that rental property. This reduces your overall tax liability.
If you find yourself with ample earnings from your rental income, check out these must-do moves for choosing a wealth management firm as you determine the best ways to invest your money.
Don’t Forget About Rental Property Depreciation
Most landlords renting out property would qualify for a depreciation deduction. Depreciation is the process of deducting a portion of the cost of your rental property throughout the “useful life” of the property instead of deducting the full cost at once. The IRS defines that time span as 27.5 years.
We recommend you work with an accountant when crunching the depreciation deduction numbers, but here are the basics. You begin by dividing the purchase price of your home by the land. The IRS states you don’t actually own the land your home sits on. An appraisal agent can provide the current cost of the property and land.
So consider this scenario. You purchase a home for $200,000. When you begin renting it out, your tax assessor puts the land value at $75,000 and the house value at $125,000. Thus, your depreciation expenses amount to $125,000 divided by 27.5 (the IRS definition of useful life span for residential real estate in years). That equals roughly $4,545. You multiply this by your marginal tax rate to get your annual deduction. Generally speaking, this can mean $1,000 to $2,000 in savings per year based on the depreciation deduction alone.
New tax laws may have reduced your tax rate so that means more potential savings. However, the Tax Cuts and Jobs Act (TCJA) reduced the interest deduction you can take if you make more than $25 million from your rentals. But you can bypass this limit by choosing to depreciate your rental property in the course of 30 years instead of 27.5 years.
You Can Reap Trump Tax Plan Benefits, Too
The TCJA expanded the overall tax benefits that landlords can enjoy. Most landlords can now take advantage of the 20% pass-through tax deduction. In this case, rental income gets passed through and added to your income from other sources (report rental income and expenses on IRS Schedule E).
Essentially, the IRS would tax only 80% of your rental income (minus expenses) because of the new tax deduction for pass-through business activity. In order to qualify, you must meet the following criteria, according to the Trump Tax Plan.
- Your taxable income doesn’t exceed limits: $160,725 (if filing single) and $321,400
(if married filing jointly).
- You operate your rental business as a sole proprietor, owner of an LLC, partner in a partnership or an S corporation shareholder.
Note that the income levels apply to the 2019 tax year and are adjusted for inflation each year. They also cover income from all sources. In addition, this tax break is set to expire come January 1, 2026. The IRS has very specific rules around the new pass-through tax deduction and property depreciation tax breaks. Working with a certified financial planner (CFP) and a certified public accountant (CPA) can be a major help here.
The Bottom Line
Renting out your home can be a lucrative business if you do it right. That includes getting fully acquainted with landlord, property and tax laws. You also want to avoid handing the keys to the wrong person. A team of professionals such as lawyers, accountants and real estate agents can make the whole process easier. While the act of renting out your home can be fairly easy with all the tools available today, you may need help identifying how to best protect your asset.
Tips for Renting Out Your Home
- Renting out your home can be as complex as it is profitable. Whenever working on additional income streams you may want to consider working with a financial advisor to make sure you do it right and are prepared to put your money to use. If you don’t have a financial advisor then finding one doesn’t have to be hard. SmartAsset free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- These days, tax filing software makes it easy to see if you qualify for landlord tax deductions. To help, we published a report on the best tax filing software on the market today.
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