Tax Benefits of Renting Out Your Home
Renting out a home can offer some significant tax breaks for homeowners. Here are some tips on how to take advantage of your rental home’s potential tax benefits.
You’re running a business
It’s easy to forget that you’re running a business but remembering that is key to taking advantage of the tax benefits. You’re going to need to keep good records of all money you spend and receive related to the rental, and it’s highly recommended to have a good accountant and tax attorney if you can afford them. They’ll be able to give advice on exactly what you can do, but these are good starting points:
- Interest: Loans are almost unavoidable in the real estate business, and interest can make up a large amount of your expenses. You can deduct the cost of interest on your mortgage, loans taken to improve the property, and possibly other credit related to your rental.
- Depreciation: Your property is an asset, so you can’t just immediately deduct its cost from your taxes. Over time, as it loses value, you can deduct that from your taxes, so make sure to report your property with the proper depreciation schedule on your taxes, and you’ll get a bit of a break on your taxes every year.
- Repairs: Small, reasonable repairs made to the property can be taken as tax deductions. Note that these are generally small repairs, not large improvements – those are considered assets that need to be handled through depreciation.
- Travel related to the rental business: Whether you live on the other side of town or the other side of the country, traveling for business purposes can be deducted from your taxes. This is one of the areas where you really want good records – trying to claim too much of your travel expenses is a major cause of audits and other legal trouble.
- Wages for employees and independent contractors: If there’s just too much work for you to do, you’re going to want to hire help. Whether they’re employees or contractors, you can deduct what you spend on them from your taxes.
- Insurance: At the very least, you’re going to need homeowners’ insurance for your property, if not more. Everything spent on that can be deducted from your taxes, which can ease the burden if insurance is starting to get a little too expensive.
- Legal and other professional services: The accountant and attorney we recommended above? They’re a cost of running your business, so can be deducted from your taxes. As an added benefit, they can help you find more tax deductions and other benefits, often for more than you’re paying for their services, saving you both stress and money overall.
- Screening tenants: Running credit checks, background checks, and anything else you need to determine if someone is a good tenant can be deducted.
- Utilities you pay for: If you pay for any of the utilities for the building, those are a cost of business, and can be deducted from your taxes.
- Appraisal and property taxes: To calculate property taxes properly, you’ll need to know how much your home is worth. A professional appraisal holds the most weight, but written estimates from several realtors, as long as they match, will also do. The cost of getting the appraisal, as well as the paying the property taxes, can be deducted from your rental income.
Can you benefit from the tax breaks of a rental home? Do the calculations above and you just may discover some extra benefits of being a landlord.