Clients have been becoming landlords lately… both by buying property specifically to rent and by keeping their current home as a rental after buying a new home for themselves. Becoming a landlord can be a great way to build long-term wealth, but it isn’t for everyone. Be sure you consider the ramifications before you jump in!
Think about more than just cash flow if you are considering buying a property to rent out. Are you prepared to deal with vetting and approving tenants, setting and enforcing expectations? Are you ready to respond to calls when the sewer gets plugged or a window is broken or the furnace breaks down or…? If not, can you afford to hire someone to manage it for you?
There are also tax ramifications to consider…
You can deduct certain expenses on your personal tax return.
- Ongoing expenses like homeowners insurance and property taxes are deductible
- Any expenses related to the care, maintenance, and upkeep are also deductible
- Repairs like furnace and appliance repairs, a new paint job and snow and lawn mowing services are deductible
- But property improvements, like a new kitchen for example, are handled differently… by depreciation
- Income losses are deductible up to certain limits
If you sell, unlike your home where you avoid paying taxes on up to $250k for a single person or $500k for a couple, you will pay capital gains tax… unless you make a 1031 exchange and sell for a like kind property.
These are simply some examples to get you thinking. Bottom line is… talk to your tax accountant to figure out how owning rental property could work for you!