Maximize Your Investment: Tax Perks of Turning Your Home Into a Rental

Maximize Your Investment: Tax Perks of Turning Your Home Into a Rental

Owning a rental home can be more than just a source of passive income; it’s also a powerful way to maximize your financial standing through tax benefits. For homeowners weighing the decision to sell or rent out their property, the tax advantages of keeping the home as a rental often tilt the scales toward renting. Here’s a closer look at the key tax benefits and how they can outweigh the financial implications of selling.

1. Depreciation Deductions

One of the most significant tax perks of owning a rental property is the ability to claim depreciation. The IRS allows you to deduct the cost of wear and tear on the property over 27.5 years, even if your home’s market value is appreciating. This deduction reduces your taxable rental income, allowing you to keep more of what you earn.

2. Expense Write-Offs

As a rental property owner, you can deduct a wide range of expenses related to managing and maintaining your property. These include:

• Mortgage interest
• Property taxes
• Repairs and maintenance
• Insurance premiums
• Property management fees
• Utilities (if paid by the owner)

These deductions can significantly lower your taxable income and improve your property’s profitability.

3. Pass-Through Tax Deductions

Thanks to the Tax Cuts and Jobs Act (TCJA), many rental property owners qualify for a 20% pass-through deduction on their net rental income. This benefit applies to individuals and businesses operating as sole proprietors, LLCs, or partnerships, providing an additional tax shield for your rental income.

4. Deferring Capital Gains Through 1031 Exchanges

If you eventually decide to sell your rental property, a 1031 exchange allows you to defer paying capital gains taxes by reinvesting the proceeds into another investment property. This strategy lets you build your real estate portfolio while minimizing immediate tax liabilities.

5. Offsetting Income with Losses

If your rental property operates at a loss due to high expenses or depreciation, you may be able to use that loss to offset other income, depending on your adjusted gross income (AGI). This can lead to significant tax savings, especially for high-income earners.

Why Renting Out Your Home Beats Selling

When you sell a property, you may be subject to significant capital gains taxes on any profit above the $250,000 exclusion for single filers ($500,000 for married couples). By renting instead, you can:

• Retain the appreciating asset: Your property continues to grow in value while generating income.
• Leverage tax benefits: Deductions and depreciation offset the cost of holding the property.
• Avoid immediate tax hits: Renting delays or eliminates the need to pay capital gains taxes until you decide to sell.

Additionally, renting allows you to keep your options open. If the real estate market shifts, you’re still positioned to sell at a more advantageous time while benefiting from the steady income and tax perks in the meantime.

Partner with Belong for Stress-Free Renting

Navigating the complexities of renting out your home and managing a property can feel daunting. That’s where Belong comes in. We’re not your traditional property management company, we’re your partner in maximizing the value of your home. From finding high-quality residents to handling maintenance and ensuring timely rent payments, we’ve got you covered.

Keep your property working for you while enjoying the financial benefits that come with it. Let Belong help you turn your home into a long-term investment that pays dividends,  in income and tax savings.

Disclaimer: We don’t enjoy using the word ‘landlord’. We prefer to refer to members in our network as homeowners and residents, not landlords and tenants, since we’re on a mission to upend and redefine the traditional landlord-tenant relationship. That said, this article is for homeowners taking the leap for the first time who are looking for answers with more common industry terms like ‘landlords’ and ‘tenants’, so in some instances we have had to stick to the old moniker for owners of rental homes. This article is not intended as financial advice.