What Are the Tax Implications of Renting My Home?
The IRS treats owner-occupied houses and rental property very differently. When you own and reside in your house, your mortgage interest is a tax deduction. When you lease property, all costs –such as mortgage interest–are deductible, you depreciate the building and developments over time, and you also count lease as income. Depreciation is a tax deduction which allows deductions over the course of an asset’s useful life.
Leasing Under Two Weeks
You may choose the mortgage interest deduction and let your house out tax-free for up to 14 days per year. Not too many additional money-making ventures allow you to make money tax-free. You cannot, but go even 1 day over the 14-day principle or you not only need to maintain all the lease as income, but you also lose your right to maintain the mortgage interest deduction and you cannot maintain business expenses or depreciation. So while the 14-day principle is a boon to homeowners, the penalty for violating the principle is severe.
Renting Total Time
If you move but keep your house as a rental home, you stop deducting mortgage interest on the building on the date of your transfer, and you also start taking rental home deductions and depreciation when tenants move in. The depreciation formula is the strength cost divided by its useful life. The helpful life of residential rental property is 27.5 years. Should you buy a building for $250,000 and devote $50,000 to the property cost (land itself is not depreciable), the depreciation is $7,273 annually for 27.5 years. Due to depreciation, it’s likely to make an actual profit but show a paper loss for tax purposes. Your rental income in this case is tax-free.
Leasing Part Time
Renting your house part time–more than 14 days–and living inside part time carries the worst of all potential tax consequences. The lease is income. You aren’t permitted to file for mortgage interest or expenses or depreciation. If you’re considering living in your house only part time, you may want to figure the gap between leaving it empty when you aren’t home but being able to maintain the mortgage interest deduction and receiving taxable lease without having any tax write-offs. Another comparison you could add to this mix is turning the house into a fulltime rental while being able to maintain expenses and depreciation and living in an apartment area time.