For many homeowners, using rental income to offset a portion of the monthly mortgage payment can seem like an attractive option. The income boost can make homeownership more affordable. It may even put a nicer, more expensive property within your reach financially.
However, renting out a part of one’s home presents a homeowner with some major potential pitfalls. So, if you’re thinking of finding a paying tenant for your spare bedroom, in-law suite, basement apartment, garage, or some other area of your property, here are some aspects of being a landlord that you should be aware of.
Key Takeaways
- You’ll pay your marginal tax rate on any rental income, and owe state and local income taxes as well.
- In some cases, you can reduce taxable income by reporting your expenses.
- You never know exactly what you’ll get in a renter—whether they’ll damage your home, pay the rent on time, or vandalize your property.
- Renting your property can be complicated; you might violate the law because you’re unaware of all the rental regulations in your state.
- Your renter may refuse to leave once the lease is up and you may have to initiate formal eviction proceedings, which are both costly and stressful.
Rental Income Is Taxable
If you need to generate a minimum amount of income per month from your rental, keep in mind that taxes will diminish your rental revenue.
On rental income, you’ll pay your marginal tax rate. So, if you’re in the 24% marginal tax bracket, and you receive $800 a month in rental income, you’ll only get $608 a month after taxes. What’s more, state and local income taxes will take another bite. So, make sure to account for taxes and needed income when calculating what to charge in rent.
Expenses Can Reduce Taxable Income
The good news is that you can reduce your taxable rental income by any qualified expenses associated with the rental. These include advertising, cleaning and maintenance, insurance, repairs, supplies, utilities, depreciation, and a few other costs.
You can take advantage of such tax deductions to help offset your rental income tax bill as well as charge higher rent to get the income you need after taxes. But remember, you can only charge what the market will bear.
You must report your rental income and expenses on Form 1040, Schedule E.
Before renting out your extra space, carefully weigh the risks of having what is often a stranger in your home against the benefits of the extra income.
A Renter May Cause Damage
You’re probably savvy enough to know that you should include a security deposit in your lease and collect it from your tenant before they move in. A security deposit is intended to cover any potential damage to your property that exceeds normal wear and tear.
While you might be understanding of accidental damage, it’s important to collect a deposit of sufficient amount to cover costs associated with foreseeable as well as unexpected events.
Sometimes tenants cause massive damage to the properties they rent. It could be thoughtless or accidental—they leave a door unlocked and your home gets burglarized, for example. Or a frayed electrical cord starts a fire. In these instances, the damage may not be intentional. Nonetheless, it could have a major negative impact on you.
Your homeowners’ insurance will probably cover the financial losses, but it won’t compensate you for the time and stress of making your home more secure or having it rebuilt. It also cannot replace any personal or sentimental objects.
While not exactly damage, your tenant could introduce bedbugs, roaches, or other pests to your property. Such insects can be difficult and costly to get rid of.
Unfortunately, some tenants may intentionally vandalize your property and steal from you. In some nightmare situations, landlords have discovered that a tenant was running an illegal operation out of their property. In these worst-case scenarios, it may be necessary to file criminal charges or sue in court.
You Run Afoul of Landlord-Tenant Law
In an attempt to protect tenants against unscrupulous landlords, landlord-tenant law contains many pitfalls that even the most conscientious landlord can fall into if they are not aware of the rules. Here are some areas where you might slip up:
- Failing to provide proper advance notice or to obtain permission before entering the tenant’s unit (and thus violating the tenant’s privacy)
- Failing to provide housing that is safe, habitable, and in good repair
- Renting a unit that contains mold, which can make a tenant sick
- Violating city housing codes—for example, some locales limit the number of people who can occupy a property based on square footage or the number of bedrooms it contains
- Failing to provide or maintain amenities promised by the rental agreement (like a swimming pool) and thus violating its terms
- Charging a security deposit that exceeds state maximums, using it improperly, or failing to return it within a required timeframe when the tenant moves out
- Failing to provide sufficient heat or air conditioning
At best, these mistakes could simply cause you to lose your tenant. At worst, you could be sued and be financially liable. Landlord-tenant laws are state-specific. Make sure to research your state laws.
Upkeep and repairs that you might be inclined to let slide when they’re only affecting you can become liabilities when a renter lives in your home. Be sure to monitor all maintenance needs regularly.
Your Renter Won’t Leave
Another possible complication you may face when you have a tenant is that they refuse to leave your property.
Your situation may change—you can make your monthly mortgage payment on your own, a child needs to move back home, or you want to move in an elderly parent. Or, perhaps your renter technically hasn’t done anything wrong, but they’re just not a good fit personality-wise.
These are times that you’d need your renter to move out.
Most renters are decent people who will leave when they can’t pay, or when their lease expires. But sometimes a tenant won’t leave when they should or will stop paying rent but keep occupying your property.
In these cases, you’ll have to go through eviction proceedings. Eviction laws are strict, and landlords must follow them exactly for an eviction case to stand up in court. Proceedings can be time-consuming and costly—you may have to hire a lawyer.
Is It Difficult to Evict Tenants?
It can be. At the very least, the eviction process is complicated. It requires that landlords know and carefully adhere to relevant laws. Common mishaps that landlords create for themselves include trying to remove a tenant by force without a legal order, making paperwork mistakes that hold up proceedings, failing to give a renter proper notice to vacate, and failing to document lease violations.
How Can I Protect Myself When Renting Out a Room in My House?
You can inform yourself of the laws relating to leasing property, pay for the professional screening of prospective tenants, obtain a sufficient security deposit, and meet your responsibilities to the tenant as detailed in the property agreement.
What Rental Expenses Can I Deduct From Rental Income?
The Bottom Line
Regardless of the reason for choosing to rent out part of your property, there are crucial aspects related to the experience that all would-be, live-in landlords should consider. Look at both the pros and cons with care before deciding whether having a tenant in your home is the right step for you.
link