If you're in the market for a new home, you might have contemplated the idea of holding onto your current property and renting it out. This decision comes with both financial advantages and potential setbacks. Here's a closer look.
Financial Opportunities:
When you become a landlord, you'll need to report rental income on your tax return. However, you can also claim deductions for various expenses, such as utilities, maintenance, and depreciation. These deductions can help offset your rental income, potentially reducing your tax burden.
Tax Considerations:
Renting out your home could impact your eligibility for certain tax breaks, particularly if you plan to sell the property in the future. Typically, homeowners can exclude up to $250,000 (or $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence. However, this exclusion is contingent upon using the property as your main residence for at least two of the past five years.
Renting out your home for an extended period could jeopardize your eligibility for this tax benefit.
Additional Tax Implications:
If you do sell your rental property, you may face tax consequences related to depreciation deductions and periods of nonqualified use. Depreciation deductions taken during the rental period could result in higher taxes when you sell the property. Additionally, any gain allocable to periods when the property was not used as your principal residence may not qualify for the capital gains exclusion.
Considerations for Selling at a Loss:
If you ultimately sell your rental property at a loss, you'll need to establish that the property was permanently converted into income-producing real estate to claim the loss for tax purposes. However, the deductible loss may be limited based on the property's basis, which is typically the lower of the actual cost or the fair market value at the time of conversion.
Contact Us:
Deciding whether to turn your home into a rental property is a complex matter with significant financial implications. Consulting with a tax professional or financial advisor can help you navigate the potential benefits and drawbacks of this decision and make an informed choice. Feel free to reach out by scheduling a meeting with your VAAS Tax Consultant. We look forward to working with you.