How to Become a Landlord & How It Affects Your Taxes

Rent is a passive source of income.

Rent is a passive source of income.

To become a landlord, you'll need to find a property, with banks normally requiring a 20 to 25 percent down payment on your mortgage. You'll also need to find good tenants with the ability to afford the rent. This will have two effects on your taxes: you'll have to pay taxes on your rental income, but you will also be eligible for deductions relating to your property.

Find a Property

Look for a rental property close to home. According to CNN Money, it's best to purchase a rental property in a familiar area so nothing about the neighborhood catches you by surprise. Ask the sellers to see recent lease agreements, so you know what you can expect in terms of rent income. Aim for a property with rent that will cover your mortgage payments, plus 20 percent to cover other expenses.

Select Tenants

Finding tenants is about more than simply listing your property in the classifieds -- you need to do your research to make sure you get the best tenants you can. Consult with a local lawyer to find out what you can and can't ask prospective tenants. Some things you'll want to know are the renter's income, employment history and credit rating. You should ask for references from past landlords and verify the applicants' information. Importantly, you should ask for identification so you're certain that the person you're dealing with is who he says he is. You can require a lease, or rent the property month-to-month depending on the local market demand. Leases are more secure, but month-to-month rentals can be easier to fill in a competitive market.

Paying Taxes

If your rental property turns a profit, you'll be taxed on your earnings. These earnings must be reported to the Internal Revenue Service on Schedule E of form 1040. You must include any rent that your tenants have paid you, including any advance rent that has been paid to you. You must also include any additional expenses that the tenant pays directly to you such as utility costs or parking expenses. You don't need to include security deposits that you plan to return, but if you keep a security deposit you need to report the income.

Deductions

You may have to pay taxes on your income, but there's a silver lining to this cloud: you can also claim deductions related to your rental property. You can deduct several costs including advertising, maintenance, travel related to managing the property and utilities. You can also deduct your mortgage interest expenses and depreciation costs. These expenses must be deducted at the time that you incur them, even if you receive the product or service at another time. There is no limit to the amount that you deduct, so long as the expenses are related to your rental property.

About the Author

Dani Arbuckle is a successful business writer with expertise in general management and strategic management. Arbuckle is also an active runner and marathoner who writes extensively on running and other sports.

Photo Credits

  • Hemera Technologies/AbleStock.com/Getty Images