When you become a landlord, you not only get additional income, but you'll also get several tax breaks for write-offs you can't take for your own residence. But being a landlord comes with additional headaches as well as a lot more paperwork. Keep careful records of all income and expenses throughout the year and you'll reduce stress at tax time.
Does Renting a House Change Your Tax Status?
If you own the property as an individual and not as part of a partnership or corporation, there is no change in tax status. You'll choose the same filing status as before, whether it's single, married filing jointly, head of household, and so on. The only difference is that you'll report income and expenses from your rental property on Schedule E, and profits from the rental will be included in your taxable income from other sources. The good news is that rental profits are not subject to self-employment tax.
Can You Write Off Taxes for Losing Money on Renting a House?
Even though you'll discover owning rentals is no picnic, the IRS considers rental income to be passive income, even if you personally manage the property, mow the lawn and kill spiders for a squeamish tenant. The only way around that classification is if actively managing rental property is your sole source of income; or if managing the property constitutes more than half of your business activities, and you work more than 750 hours per year at it. Otherwise, your rental losses are limited to $25,000 per year, or $12,500 if your filing status is married filing separately.
Can a Landlord Get Tax Credits for Renting to an Underprivileged Tenant?
The IRS funds the Low Income Housing Tax Credit program, though states actually allocate the cash. You'll need to apply to your local state allocating agency to get a piece of the affordable housing pie. There's plenty of paperwork involved, including annual verification of tenant incomes and harsh penalties for non-compliance. But if you're selected, you'll get a credit against tax liability based on the amount of your investment in affordable housing. The minimum requirements: you must commit to a 30-year program and follow precise guidelines on incomes of the tenants you select for the eligible units. At least 20 percent of the units in the building must be reserved for tenants below 50 percent of the local median income or 40 percent of the units reserved for tenants below 60 percent of the local median. The LIHTC also caps the amount of rent you can charge.
Can a Landlord Write Off an Evicted Tenant's Rent Debt on an Income Tax Return?
If you own rental property as an individual and not as a corporation, the IRS does not allow a write-off for rents not received. However, you can deduct any expenses associated with evicting the tenant, such as legal fees and any repairs required for damaged property.
Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.