The other day I was having a conversation with a new client, and the question came up about renting his home out for the summer. As the client told me, generally for the months of July, August and September he lives with one of his children who live out of state. The client was recently approached by a friend of his who knew someone looking for a home for the summer. As the client said, it would be a great way to earn some extra money and he wanted to know my thoughts. Because many people these days rent out their home or a room, I thought it would be important to review some of the legal and tax implications.
When you rent out your home or a room in your home you are becoming a landlord. As a landlord, you have rights and responsibilities, and it is important before you let someone rent your property to prepare a lease that sets forth all the terms. These terms would include items such as how much monthly rent is, security deposit, who is responsible for utilities, and maintenance on the property such as cutting the lawn. I cannot stress enough how important it is to put the terms of the lease in writing. Furthermore, I would venture to say that the great majority of people should not be drafting a lease themselves; rather, they should have an attorney draft it. After all, if you’re renting out your home, your home is probably your largest single investment and, as such, is worth the few hundred dollars to have the lease drawn up by a professional to protect yourself.
As a side note, it is important that before you lease out your property you do some sort of screening of the potential tenant. After all, we all know the stories about tenants from hell, and you don’t want one of them. Spending some time to prequalify someone is well worth the time and effort.
With regard to the financial aspect, there are some tax issues you should be aware of. The tax ramifications when you are a landlord are totally different than when it is your personal home. As an example, your condo or homeowners association fees can potentially be deducted when you rent your home but they are not deducted if you are the owner occupant. Furthermore, if you are paying the utilities on your rental property, that can also be deducted, but as a home owner, those expenses are not deductible. Therefore, if you do decide to rent out your property, it is important to keep track of all the expenses that relate to the property.
Many people believe that when you rent out your property you do not have to report the income as taxable. Unfortunately, that is not the case. However, there is one exception to the rule and that is if you rent your house on a part-time basis. The IRS defines part-time basis as renting out your home 14 days per year or fewer. If you do rent your house out for 14 days or fewer, any rental income that you earn will be tax free.
For those of you who do rent out your property more than 14 days a year, your income, less expenses, does have to be reported to the IRS. However, there is a tax break for you that was created under the new tax law. Under the new tax law, pass-through businesses, which the great majority of people who rent out their property would be considered, you are allowed to exclude 20 percent of your income from your taxes. In order to qualify for the 20 percent deduction the total income must be below $157,500 or $315,000 if you’re married and filing a joint return. If you are above this threshold the deduction begins to phase out and it is gone altogether if your income is above $207,500 and you’re single, or $415,000 if you are married.
Renting your home or a room out can be a source of additional income. However, as landlords will tell you, it can also be a source of frustration. Therefore, it is important that before you become a landlord you weigh the pros and cons. If you can find the right tenants, leasing out your property can be a very good source of revenue. On the other hand, if you do get a tenant from hell, I can almost guarantee you will curse the day you became a landlord. There is no 100 percent guarantee; however, screening your potential tenants and having a well-drawn lease are good ways of protecting yourself.
Good luck!
If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.