Rental units bring extra income, but turning your home into a rental means major changes to your income tax filing. Housing trends highlighted a major shift from homeownership to rental living in 2010. Renters in numerous large metropolitan areas, including Salt Lake City, Baltimore and Minneapolis, outnumbered homeowners in that year. Using your main residence as a rental might offer extra income -- with federal tax deductions sweetening the business proposition.
Mortgage Interest Deductions
A house or condo with a mortgage means you can typically deduct the interest paid on the loan each year on your federal taxes. Money paid on the loan principle doesn't qualify for deductions. If you have a second mortgage or use your home as a source of cash in a home equity loan to make home improvements or pay for educational expenses, the interest paid on these loans also typically qualifies for federal tax deductions.
Homeowners can't take federal tax deductions for home repairs, but rental owners can take tax write-offs for repairs for a rental property. A leaking faucet in your home fails to meet the standards for a federal tax write-off, but the same payment made to repair a leak in a rental unit is a valid federal tax claim.
Federal tax laws also allow tax deductions for regular maintenance on rental properties, including lawn services and new interior and exterior paint. Payment of local property taxes qualifies for federal deductions for both rental and property owners, but landlords also have the option of deducting water bills paid for landscaping on a rental home.
Selling a rental unit for a profit means you pay federal capital gains tax on any profits from the sale. As a rental business, you can deduct the cost of selling the rental home on your federal taxes, including any fees paid to real estate agents and expenses for title and escrow services charged on the sale. Homeowners selling the same house as a personal residence have a gains exemption on any profit made from the sale. Federal law allows single owners to avoid federal taxes on a profit of up to $250,000 for the residence. You can also claim your homeowner capital gain exemption when moving back to a former rental property, provided you live in the home for two of the last five years before you sell the house.
Houses owned for rental purposes qualify for a tax deduction for depreciation on the property. Residential property doesn't qualify for this tax write-off. The yearly depreciation deduction requires a complex calculation based on the "expected life" of the house and the years the house has been used as a rental property. Accounting practices usually depreciate rental property over a term between 3 and 20 years.
The Internal Revenue Service treats rent collected on your main home as income. Rental income is taxed the same way as any other income. You can deduct mortgage interest, maintenance costs and depreciation from the payments collected as rent to reduce the amount of income each year.
- USA Today: More Than 500 Cities See More Homes Become Rentals
- IRS: Publication 936 -- Home Mortgage Interest Deduction
- IRS: Rental Income and Expenses -- Real Estate Tax Tips
- Department of the Treasury Internal Revenue Service: Publication 527 -- Residential Rental Property
- IRS: Depreciation of Rental Property
- IRS: Topic 701 -- Sale of Your Home
- IRS: Rental Income and Expenses
- IRS: Deducting Rent and Lease Expenses
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- Tax Deductions for Investing in Property in Canada
- Tax Questions for a Second Home
- Tax Benefits of Land Leases