Taxes and Financial Implications of Renting Out Your Home: What Every Property Owner Needs to Know

Thinking about turning your home into a rental property? Whether you're upgrading, relocating, or just testing the waters of real estate investing, renting out your home can be a profitable move—but it comes with tax implications and financial responsibilities that every property owner must understand.

In this resource, we’ll break down the key tax rules, financial benefits, and potential pitfalls, so you can confidently step into your new role as a landlord.

Rental Income Is Taxable

Once your property is rented, the money you collect from tenants is considered taxable income by the IRS. This includes:

• Monthly rent payments

• Non-refundable deposits

• Lease cancellation fees

• Any services you provide (like lawn care) that tenants pay for

You Can Deduct Rental Property Expenses

While rental income is taxable, the good news is that many of your expenses are deductible, helping reduce your tax liability. Common deductions include:

• Mortgage interest

• Property taxes

• Property management fees

• Homeowner's insurance

• Repairs and maintenance

• Utilities (if paid by you)

• HOA fees

• Advertising costs

Depreciation: Your Hidden Tax Benefit

One of the most powerful tools for property owners is depreciation. The IRS allows you to deduct the cost of your rental home (excluding land) over 27.5 years, even if the property's value is increasing!

Example: If your home’s structure is worth $275,000, you can deduct $10,000/year in depreciation.

Be Aware of the Passive Activity Loss Rules

If your rental property runs at a loss (your expenses exceed your income), the IRS classifies this as a “passive activity loss.” Generally, you can deduct up to $25,000 of losses if your adjusted gross income (AGI) is under $100,000.

However, this benefit phases out completely at $150,000 AGI. Investors with higher incomes may have to defer losses until they sell the property.

Self-Employment Tax Does Not Apply (Usually)

Good news! Most landlords don’t pay self-employment tax on their rental income—unless they provide substantial services like daily housekeeping or meals (more common in vacation rentals).

Selling the Property Later? Understand Capital Gains Tax

If you decide to sell your rental home, you’ll be subject to capital gains tax. However, real estate investors can reduce or defer taxes with strategies like:

• 1031 Exchange (swap property for another)

• Tracking capital improvements

• Using long-term capital gains rates (if held over a year)

  
  

Should You Form an LLC or Keep It Under Your Name?

Many first-time landlords ask whether to hold their rental property under an LLC. While an LLC can provide legal protection and tax flexibility, it’s not always necessary—especially if you’re just renting out one property.

Don’t Navigate This Alone — Speak to a Property Management Expert

Managing a rental home means balancing tenant needs, financial tracking, tax planning, and legal compliance. Whether you’re a first-time landlord or an experienced real estate investor, a property management company can save you time, stress, and money.

✅ Claim Your Free 15-Minute Consultation

We’re offering a free 15-minute phone consultation to help you understand the financial and tax aspects of renting out your home.👉 Just mention promo code: DEDUCTIONS when you book.

Let’s make your real estate investment work for you—not against you.📞 Ready to chat? Contact us today at sales@borneomanagement.net or via phone at 321-209-4279.