Ask Kim
What to Know if You Rent Out Your House
Here's what you need to know about taxes and insurance if you turn your home into rental property.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
December 24, 2009
I will be transferred to a new city soon for my job, but housing prices have dropped so much since we bought our house that we can’t afford to sell it. Our only real option is to rent it out and wait for the market to recover. What do I need to know about insurance and taxes?
First on your to-do list: Replace your homeowners insurance policy with rental-home insurance. It covers the building and provides liability protection but doesn’t cover possessions, so it tends to cost about 20% less than a regular homeowners policy, says June Walbert, of insurer USAA. She also recommends including a section in the lease requiring your tenants to buy renters insurance, which will cover their liability and belongings.
When you file your tax return, you’ll generally report rental income and expenses on Schedule E. You’ll be able to deduct your mortgage interest on the rental property, as well as insurance premiums, real estate taxes, advertising costs to rent the house, rental management fees, utilities you pay, travel to and from the property, and legal and accounting costs.
And you can deduct depreciation -- basically the purchase price of the house (but not the land) divided by 27.5 each year -- and the cost of repairs. You can’t deduct home improvements that add value to the property, but you add the cost of improvements when figuring depreciation. If your expenses exceed your rental income, you can deduct up to $25,000 of the loss against other kinds of income. (That loss allowance declines if your income is more than $100,000.)
Keep a close eye on the calendar, recommends Mark Luscombe, of CCH Tax and Accounting. If you wind up renting for more than three years, you’ll lose the opportunity to claim any tax-free profit from the eventual sale. To qualify for up to $500,000 in profit tax-free when you sell a home, you generally must have lived in it for two of the five years leading up to the sale. For more details, see IRS Publication 527, Residential Rental Property.
Got a question? E-mail me at askkim@kiplinger.com.
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Reader Comments (7)
Posted by: Danielle F. at 12/28/2009 04:20:07 PM
When we rented out our home last year I got 4 different insurance quotes and was told the same thing by each company: "Landlord policies cost MORE even though they only cover the structure (not contents) becasue renters don't take care of property like homeowner's do" I even had one agent tell me "what if the renter's get mad at you and set the house on fire?" So, I don't know about the 20% less, one company's quote was 4 times what we were paying as regular homeowner's insurance. And the response was the same each place I called. We finally went with our regular insurance company because we got a small break for having our new house, cars and life ins. through them.
Posted by: AJL at 12/28/2009 07:15:27 PM
I agree with the below comment. Our Rental Policy is $500 more than our Homeowner's (policy) and your rental property is worth $300,000 less!
Posted by: Monique S. at 12/28/2009 07:25:06 PM
Thats unfortunate! We got pretty close to the 20% less with Safeco for our rental property. Now the rest of the story for the renatl is a whole different story. I didnt know however that the utilities we paid were a tax deduction! My tax guy failed to include that in our filings last year. We paid water and gardners for our renters!!!
Posted by: Lisa R. at 12/31/2009 02:33:49 PM
I found this article interesting, but not entirely accurate from my experience. We have a second home that we were going to rent out so we changed the policy to a landlord policy and it was about $500 higher per year than our owner-occupied policy. Also, there is definitely more risk of damage and liability with renters. We had one tenant at another house we rent out "stiff us" for the last month's rent, and then abandon the house in absolutely disgusting condition, gave no forwarding address, etc. The whole place had to be gutted and redone before another tenant could move in, and it cost us about 6 months of rental income loss, plus a whole bunch of other labor and expenses (which thankfully could be written off, but still). Be very careful who you rent to or you could have a huge nightmare on your hands!!
Posted by: Manolis at 02/27/2010 06:26:52 PM
I had a similar experience with getting insurance for my house that I leased because I could not sell it. The insurance premium was about 20% higher - NOT lower - than what I was paying when I lived in it.
Posted by: Deborah at 04/11/2010 01:32:31 AM
Since I've lived in the property in 2010, I can now rent it and reap the benefits from a sale if I sale it within 5 years, correct?
Posted by: www.RentalAds.com at 09/23/2010 09:38:16 PM
I work for www.RentalAds.com and we are seeing a huge increase in the number of rent-to-own homes being listed when compared to just a few years ago. It is a great way for both buyers and sellers to benefit in this slow real estate market. Although the selling side of real estate has slowed, the rental side has been on the increase. A rent to own option may be the answer to some of these problems.