For many homeowners, using rental income to offset a portion of their 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. Also, if you have a reverse mortgage on your home, renting a portion of it may go against the lender’s rules. 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.
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.
