Thinking of turning your home into a rental? Beyond the monthly income, there are significant tax advantages available to homeowners who rent out their property. When managed correctly, these benefits can improve cash flow and long-term returns.
1. Deductible Operating Expenses
You can deduct many common expenses related to maintaining and managing your rental. These may include:
- Property management fees
- Advertising and leasing costs
- Repairs and routine maintenance
- Mortgage interest and property taxes
- Utilities (if paid by the owner)
- Insurance premiums
- Professional services (accounting, legal, etc.)
- Travel expenses related to the property
2. Depreciation
The IRS allows you to depreciate the structure of your residential rental property (excluding land value) over 27.5 years. This annual non-cash deduction helps reduce your taxable rental income, even if your property is appreciating in value.
3. Qualified Business Income (QBI) Deduction
If your rental activity qualifies as a trade or business, you may be eligible to deduct up to 20% of your net rental income under the pass-through business income rules. This can apply to sole proprietors, LLCs, and partnerships.
4. 1031 Exchange (Capital Gains Deferral)
When selling a rental property, you may be able to defer capital gains taxes by reinvesting the proceeds into another investment property using a Section 1031 Exchange. This strategy can significantly enhance portfolio growth over time.
5. Passive Loss Rules
If your rental expenses exceed your rental income, you may be eligible to deduct up to $25,000 in passive losses from your regular income—if you actively participate in managing the property and meet income eligibility limits. Unused losses can be carried forward to future years.
6. No Self-Employment Tax on Rental Income
Unlike earned income, rental income is not subject to self-employment tax (FICA). This means you keep more of your rental profits compared to traditional freelance or consulting income.
Important Reminders
- The IRS requires accurate documentation of all income, expenses, and depreciation schedules.
- Tax laws can be complex and change frequently. We strongly recommend consulting a qualified tax advisor to maximize your benefits and ensure compliance.
Thinking about renting out your home?
At DFW Rent Houses, we not only manage your property—we help you build long-term wealth. Let’s talk about how to make the most of your investment.
