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- According to the IRS, when you rent your home to someone else, you must report the income and expenses on Form 1040 and Schedule 1040 E. How much you can deduct from the income depends on whether you live in the house or not. If you do not live in the house you're renting, and instead are renting it to make a profit, you can deduct more for expenses, including maintenance, utilities, depreciation, insurance, interest and taxes. Depending on your circumstances, you may be able to deduct more in expenses than the gross income from the rental home. If you live in the home at any point during the year, you'll have to divide the expenses between personal and profitable use, based on how many days you lived in the house, and you can only deduct up to a certain amount of the overall income.
- If you plan to sell your home at some point after you rent it, it's important that you know the Fair Market Value (FMV) of the property on the day that you start renting it. That's because if you later sell the property, the tax basis for calculating any losses on the property is the lesser of the normal tax basis, which is the original purchase price plus any improvements minus the FMV of the home on the day you convert it to the rental. If your home's value declines after you rent it, you can take a tax loss on income, provided that the loss is not offset by the depreciation deductions. If you later sell the home that you're renting for a profit, the initial tax basis is based on the FMV the day you convert the home to a rental. This has implications for the amount of gains tax you pay. Because determining the value of your home and the potential tax losses and gains that can result from renting the property is potentially confusing, consult with your tax professional before deciding to rent your home.
- If you sell a home that you have been living in for at least two of the past five years, up to $250,000 dollars, or $500,000 for married couples, of the earnings from that sale are tax-exempt. If you decide to rent that home, and sell it within three years, you still qualify for that tax break. However, if you rent the home for a longer period, you are subject to capital gains taxes when you sell it. For example, if you live in a home for two years, rent it for four, and then sell, you're subject to capital gains taxes. However, if you move back in to the home for two years, and then sell, you're exempt.
- The IRS makes a distinction between properties rented for profit and those considered not for profit. You can only deduct the expenses up to the amount of income you receive for the property. If the amount of income from the rental property is greater than the expenses for three years out of five, then the IRS assumes that you are renting the property for profit, and you can deduct losses from your income. If you do not earn more than your expenses within three years, the IRS presumes that you are renting the property not for profit, and you cannot take a loss on the property to offset other income. This primarily affects those who rent their property to family or friends for a low price. Doing someone a favor and giving them a low-rent place to live can cost you more at tax time
Deductions
Home Value
Capital Gains
Profits
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