Issues for Landlords
Before you consider converting your home into a rental property, in addition to understanding the tax issues we just discussed, also weigh the following issues.
Key Tax Facts for Landlords
If you are considering renting your home, even for just a short time, after you move out of it and before you sell it, tread very carefully! After you've converted your house into rental property, you can't avoid taxation on the profits from that property simply by purchasing another primary residence.
Attached Rental Units
The IRS makes a distinction between property a taxpayer lives in and property he or she rents out to others, even if both are within the same building. You need to understand this distinction and its tax implications.
Accidental Rental Conversion
Suppose that your house sits and sits for months on end, so you rent it out for a number of months while still on the market. If you cease seriously trying to sell your house while renting, the IRS deems that you've converted your home into rental property, and you owe capital gains tax unless you buy a replacement rental property.
If you've got some extra cash burning a hole in your pocket, consider investing in some rental real estate. Real estate is a good long-term investment. Historically, real estate investors have enjoyed average annual rates of return (in the range of 9 to 10 percent) comparable to stock market investors' returns.
Managing Your Investment
The income and resulting cash flow (income less expenses) that a property can generate drive the amount a rental property is worth. In addition to maximizing income, you can also increase a property's cash flow by minimizing its expenses.
Cash Flow From Rentals
Cash flow is the amount of money that a property brings in and the amount you have to pay out for expenses. Before you consider becoming a landlord, make some projections about what you expect your property's monthly income and expenses to be.
Selling Your Investment
If you own property that you hold solely for rental/investment purposes, you probably have a great deal of discretion about when you sell the property. As with other investments, you may be wondering when is a good time to sell.