There are many tax issues to consider when becoming a landlord. The first thing that comes to mind for most people is rental income. Rental income is taxed as ordinary income. To offset this, numerous deductions on expenses can be taken as well as depreciation of property. Something to consider: If you sell the house and qualify for the capital-gains tax exemption you’ll be taxed on the amount you depreciate, which could make renting out your home considerably less attractive.
Back to expenses: you can deduct pretty much any out-of-pocket expenses related to owning and managing the property. This includes your mortgage interest payments and property taxes. There are other expenses as well, such as advertising or broker fees, the costs of repairs to the property, maintenance expenses such as cleaning services, utilities and management company fees, the cost of fire and liability insurance, and even travel and local transportation expenses incurred for the maintenance of the property and collection of rent.
Improvements can’t be deducted, but you recover their cost by depreciation. The good news is, you typically depreciate the cost of any appliances, carpeting, furniture or plumbing over only five years. So if you buy a new $1,000 dishwasher for your rental, you can deduct $200 a year from your rental income for five years.
Depreciation is pretty straight forward: just divide the fair market value of the property at the time you start renting it out (excluding the cost of land) by its recovery period which is 27.5 years for residential rental property and you get your annual depreciation. For example, if the home is worth $550,000, you divide that by 27.5 and get a $20,000 annual deduction. If you have another $10,000 in out-of-pocket expenses, which are also deductible, you can get $30,000 in rent tax-free.
This content is to help in the decision making process of whether or not an individual should rent out their home. I would recommend consulting with a CPA to get further information since tax laws are constantly evolving.
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