The Tax Effect of Renting Your Home

tax effect of renting your homeNot sure what the tax effect of renting your home will be? Did you decide to move and put your old home on the rental market? Depending on the housing market in your area, this may very well have been the best choice for you. Or maybe you want to rent out your second home? This can help cover the costs of the mortgage and any upkeep. Companies such as Airbnb make this easier than ever. Regardless of the reason, you now have an obligation to report the income on your tax return. If it is only for a few days, you may not owe anything. Don’t worry, many people have done the same thing, but they are not exactly sure on the tax effect. This article will give a brief overview of what to expect, what you can deduct, and the overall tax impact. A great resource for additional information can be found in IRS Publication 527.

Schedule E, Page 1, Part I, is used to report all rental income and deductions for the home. Your deductions include things such as advertising fees, utilities, mortgage interest, property taxes, and depreciation. You can view a list of the most common deductions here. Your net profit or loss is then calculated on the schedule based on your income less deductions. This amount then flows to page 1 of your Form 1040. The income from the rental is included as part of your adjusted gross income (AGI) and is used to calculate your taxable income. You do not owe self-employment tax on this income.

If you end up with a rental loss, you can deduct up to $25,000 of rental real estate losses against any type of income based on certain limits. For 2015, the amount you can deduct phases out between an AGI of $100,000 and $150,000. For an AGI over $150,000, no deduction will be allowed. You must have actively participated in the business during the year in order to take this deduction. Alternatively, you can deduct your loss against other passive income for the year (such as another rental property you may own). There is no phase out for this deduction.

An important note about the depreciation deduction: choosing to reduce the basis of your home is not optional. Should you choose not to take advantage of the deduction and depreciate your home, you will still have to account for the depreciation on the eventual sale of your property. This means that you will end up with a bigger gain upon sale regardless of whether or not you include the depreciation deduction on your return. The depreciation deduction is calculated by taking the cost basis of your home (the building portion) and deducting it over 27.5 years. In other words, the deduction for one full year would be your cost basis/27.5 years.

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