So you think you want to be a landlord, do you? Your second home is in the perfect vacation spot and the extra income will add a nice boost to your bottom line.
Continue Reading Below
But before you skip off to place a classified ad, be warned: Renting out your property can become complicated, particularly for those in the wrong mindset, experts warn.
“So many people fail to truly treat it like a business, and that makes a big difference between a successful experience and one that isn’t,” says Tom Bissmeyer, founder of iTrip.net.
Still interested? Here are some tips for renting out property like a pro:
Know the law: One of the first things to address is whether you’re permitted to rent out your property in the first place — no easy feat, says Christine Karpinski, author and rental property expert. “It all depends on your home, your area and your local government. You might have to do some digging,” she says.
A good place to start is look at your homeowners’ association’s CC&Rs (covenants, conditions and restrictions), documents that dictate how the homeowners’ association operates and what rules the owners must obey. Your local sales tax office may be able to provide some direction, too.
Get insured: Owners should notify their insurance provider that the property is being used as a rental and buy a rental rider that will pay for lost rent in the event of a loss that makes the house inhabitable, such a fire or flood, says Tony Drost, 2011 president of the National Association of Residential Property Management. Check if your hazard insurance pays for damage to tenants’ personal possessions; it most likely doesn’t, in which case you may want to require that tenants get renter’s insurance as well.
Continue Reading Below
Pay attention to the tax rules: Owning an investment property for the purpose of making an income opens to the door to a host of juicy tax write-offs, including mortgage interest, property taxes, insurance and virtually any expense you pay for upkeep, says Cindy Hockenberry, tax knowledge center supervisor, NATP.
But keep in mind that there’s a difference between claiming a repair and claiming an improvement: A straightforward repair, such as fixing a broken window or changing a lock, are written off as an expense in the year the cost was incurred. Anything that would prolong the property’s useful life — ie: installing a new roof, putting on a new roof — must be claimed as a depreciable asset over its “class life” — a period determined by the IRS. (Typical rental properties are depreciated over 27.5 years; new carpets or new appliances are seven years.)
But the tax rules can get even trickier: The IRS distinguishes between “active” and “passive” participation in the rental activity when it comes to declaring losses. Those who materially participate in the property — this includes collecting rent, finding tenants, ensuring repairs are completed — are allowed to deduct up to $25,000 against other income. However, those who hire a manager to do their bidding can only deduct a loss if they have other passive income.
Yet another layer of rules apply to those who own a property that they use both personally and to generate income. The IRS says those who use the property personally for more than 14 days or more than 10% of its rental availability can only deduct expenses for the number of days it’s actually held out for rent. (If you use it for less than that, there’s no need to keep track.)
Finally, there’s no need to claim a security deposit as income if the intention is to return it at the end of the lease or agreement.
Don’t forget sales tax: Most states require you to collect and remit sales taxes, which often requires a business license. Contact your state’s Department of Revenue to find out the rules in your area. In Wisconsin, for example, there is no sales tax on rental income, nor do tenants have to pay sales tax on rent, Hockenberry says.
Be professional: There are two simple things you can do to make your transaction with potential customers seamless: Respond quickly to rental inquiries — (”We live in an internet world and people expect a response instantaneously,” Bissmeyer says) — and accept credit cards.