Once you know that you'll be renting your place out, keep records of all expenses for the property. Whether you are renting an entire residence or a room within your personal home, you need to track all expenses related to making that space available for rental.
The easiest way is probably to just create a file (or even a gallon-sized freezer bag) and toss receipts, leases, and other documents in as you get them. Sort them into piles at year end, add up the amounts in each pile, and staple the adding machine tape or a note with the total on it to each pile.
Nine rental property tax deductions
Deductible expenses include:
- Preparing the property to rent (cleaning, weeding, painting)
- Advertizing the property
- Management fees
- Travel between your home and the rental
- Mortgage interest
- Mortgage refinance charges
- Property taxes
Tax deductions for room rentals
if you're renting out part of your main home, you can deduct only a portion of the total expenses of the property. So if you rent out 400 square feet and the total living area of your home is 2,000 square feet, you can deduct one-fifth of the costs of the home's upkeep.
Don't forget depreciation
Depreciation is based on the property value (and that of furnishings and appliances too). These things are calculated in different rates. Your home's rate is usually 27.5 years, taking the purchase price divided by 27.5 each year. Most furnishings and appliances are depreciated on a 5-year schedule. Depreciation can be complicated: invest in tax software or an adviser to deal with it.
When is income not income?
In most cases, when you rent out your property, you decrease tax liability. That's because rental income does not generally cover all of your deductible expenses, especially once you add in depreciation. You file your rental income / expenses on a Schedule E, which means that even if you take the standard deduction, you'll be able to deduct the mortgage interest on your rental.
Refinance before you rent
If you can save money by refinancing your mortgage, do it before converting your home to a rental property and deduct the expenses. Once you classify your home as a rental, refinance rates are a lot higher and it's harder to get approved.