Renting out your home is no problem, but you should know that you must declare your net profits as ordinary income. If you own your home personally, rather than through some third-party entity like a trust, you would do so using a Schedule E on your own individual tax return.
That’s net rental income, though. You do get to subtract from your gross rental income any expenses you incur in renting your property. These can include real estate commissions, marketing costs, developing and operating a website promoting your property, legal fees advising you on your rental business, tax planning fees related specifically to the rental activity, and the like.
If you rent your home for less than two weeks during the year, though, you can take the income tax free. That’s a good deal, and many people in desirable communities choose to do just that.
However, once you hit that 15th day, all that rental income becomes taxable.
Renting out part of your home
If you choose to rent out a room or guest suite for a longer period of time, you can take some advantage of some partial deductions, normally based on the percentage of the square footage of your home you rent out. For example, you may be able to deduct a pro rata percentage of the following expenses that are not normally deductible if you are occupying the entirety of your own home as the owner-resident:
- Repairs and maintenance costs.
- Insurance premiums
- Security and fire alarm system costs
- Internet/WiFi, if you make it available to your tenant.
- Cleaning, gardening and landscaping services
- Garbage removal
- HOA fees
- Cost of setting up a separate bank account for rental activity
- Background check fees
- Investment-related periodicals
Note that you cannot take a depreciation deduction at all on a home that you live in yourself and you don’t rent out at all. If you rent out a part of your home, you can take a partial deduction for depreciation.
The IRS lets you use any reasonable method for calculating or dividing your expenses between your own private accounting and your rental accounting. You can use a square footage method, or you can use a method based on the number of rooms in your home.
Good record-keeping, of course, is vital: You’ll want to keep all your receipts from any rental activity.
For more information, see IRS Publication 527 – Residential Rental Property.
Note: Some people have tried to rent out the property very cheaply, or for only a short period of time, while taking big deductions for the costs of home repair, utilities and other expenses. It won’t work. The IRS is on to that trick, and will disallow any deductions that are more than the income you actually received in rent. You may be able to roll some of those expenses forward and deduct them in future years, though. Check with your tax advisor for specifics.
Warning: If you are renting out your home, or part of it, for more than a couple of weeks per year, you’ll probably want to consider taking out landlord insurance. This insurance provides extra liability coverage and is designed to protect you and the tenant alike. If you don’t have landlord insurance, and your tenant or a guest is injured or otherwise has a claim, and your insurance company finds out you’ve been renting out the home and didn’t disclose that and get a landlord insurance policy, they could deny the claim. Speak to your property and casualty insurance professional for specifics. I’d also suggest getting some liability umbrella insurance coverage to act as a backstop to your homeowner’s, landlord’s and even your automobile policy as well.