Converting Personal Residence into Rental Property
When someone decides to move into a larger home, they may choose to rent the residence they currently reside in instead of selling the property. Perhaps it is just not the best time to sell due to a down market; or maybe the homeowner would like to create more equity in the property.
If you find yourself in this scenario, here is what you need to know about converting your personal residence into rental property.
Once you begin renting your property, you can deduct, as rental expenses, maintenance, insurance, taxes, repairs and interest. You can also deduct depreciation expense. The basis for depreciation will be the lesser of fair market value or the adjusted basis on the date the personal property was converted to a rental property. (Special situations apply for condominiums, where you can deduct maintenance fees of the common elements. However, you cannot deduct special assessments for improvements. You would be able to recover these costs by taking depreciation.) Rental income and expenses are reported on an individual’s Schedule E of their personal tax return.
Converting a residence to rental property does not automatically preclude the taxpayer from taking advantage of the gain exclusion rules for a residence when the property is sold. If the property is rented for three years or less and then sold, a taxpayer may still be eligible for a portion of the gain exclusion because it is possible the use test will be met as well as the other rules for excluding gain.
One way to find a tenant is through a real estate agent who has experience leasing properties. The agent can offer suggestions for how much rent to charge and screen potential tenants. You should have a lease agreement between you and the tenant that is as detailed as possible. For instance, the agreement may state what expenses the tenant will be required to pay, right of entry and alterations to the property, to name a few. Additional ways to find tenants is through social media, advertising on rental websites and/or word of mouth.
You may want to consider hiring a property manager if you think you will need assistance managing the property. Generally, property managers are paid approximately 10% of gross rents. You can ask a real estate agent for recommendations. Also, if you need to start the eviction process, a property management company can assist you with the process.
Insurance coverage will change once you begin renting the property. To protect yourself against tenant lawsuits, you should have adequate personal liability insurance. You no longer have to pay to insure your personal belongings since the property will be rented. A homeowner’s insurance policy for renters might include lost rental income reimbursement. Make sure you have the coverage that suits your needs.
If you would like to convert your personal residence into a rental property, be sure to take the appropriate steps. Let us know if we can help!