Whether you rent out a portion of your home, like a finished basement, or an entire property you own, taking in rental income is a great way to boost your earnings. But there are tax consequences associated with renting out your home, so be mindful of these things as you gear up to file your tax return in time for this year's April 15 deadline.
1. You must report and pay taxes on your rental income
Just as the Internal Revenue Service (IRS) gets a piece of the income you earn from a salary, side gig, or investments, so, too, is it entitled to a chunk of your rental income. As such, you must report that income when you file your return, and you can do so by attaching Schedule E to your Form 1040. You can use a single Schedule E to report your income for up to three rental properties; beyond that, you'll need to file an additional Schedule E.
Keep in mind that while you're required to list any payments you received from tenants, security deposits do not need to be reported as income if you have no intention of keeping them.
2. But you may not need to pay taxes at all
If you rent out your home for 14 or fewer days during one calendar year, here's some good news: You actually won't have to pay the IRS a dime in taxes on your rental income. It doesn't matter if you rent out your home for a few days here and there or for 14 days in a row -- as long as you don't exceed that 14-day limit, your rental income is yours to keep in full.
There is, however, a second requirement at play here: You must also use the home in question yourself for at least 14 days per year, or at least 10% of the time you rent it out to other people.
3. You can deduct expenses associated with your rental
There are certain costs you're apt to incur in the course of renting out a property, and the good news is that the IRS will allow you to deduct them on your tax return. These expenses include:
Be sure to keep accurate records of what you spend in all of these areas. That way, you'll know what to claim on your return, and you'll have backup in case the IRS comes asking questions after the fact.
Knowing the tax rules associated with taking in rental income could help you avoid an IRS headache this year. If you're new to being a landlord, you may want to enlist the help of a tax professional to complete your return and navigate any tax issues or questions you may have. A modest fee could save you a world of hassle and open the door to savings you didn't know you were entitled to.