Here are three things to consider when you convert your primary residence to a rental property.

Maybe you outgrew the home, or the market is not favorable for selling, or you are traveling and want to rent it in your absence. Whatever your reason, here are three things to consider when you convert your primary residence to a rental property.

  1. You will be adding a new schedule to your Form 1040. Rental real estate income is reported on Schedule E, page 1. This applies if you will be renting out your primary residence for more than 14 days.
  2. You can now deduct expenses related to the property that you couldn’t before.  Examples of deductible expenses provided by the IRS are:
    •  Advertising.
    • Auto and travel expenses.
    • Cleaning and maintenance.
    • Commissions.
    • Depreciation.
    • Insurance.
    • Interest (other).
    • Legal and other professional fees.
    • Local transportation expenses.
    • Management fees.
    • Mortgage interest paid to banks, etc.
    • Points.
    • Rental payments.
    • Repairs.
    • Taxes.
    • Utilities.

Depreciation is the most notable of the expenses, because it does not require cash. The home structure will be depreciated at 27.5 years, but items such as appliances will have a more favorable life of 5-7 years. Depreciation can take a rental that has a positive cash flow and turn it into a loss with no cash outlay. The depreciation will be subject to recapture however, so you should keep that in mind if you plan on selling the home in the future.

Also, keep in mind that you will have to allocate the expenses between personal and business if the property was not a rental property for the entire year.

3. You may be able to protect some of your regular income from tax. If you have a loss and you are not a real estate professional, there is a limit to the amount of loss you can claim. If you are making the management decisions, it is likely that you are considered actively participating, and you will be able to deduct up to $25,000 of losses if you are married filing a joint return. This deduction will phase out, so be sure to seek the advice of a qualified tax professional to see who it may affect your personal situation.  If you are a materially participating individual (which involves meeting more tests), then you would be eligible to take the full loss.

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Contact Us With Your Questions
If you have questions or need help determining how converting your home into a rental property, contact our tax professionals at The Innovative CPA Group at 203-489-0612. Or contact us online.