Accidental Landlord Tax Tips and Implications

Editorial team of TFX

• 25.11.21 • 5 min read

The probabilities of renting a home are slightly higher than one in three. The number of American households renting has increased to the point where they are more prevalent than ever before, but some readers may own their houses outright or pay for a mortgage.

Is it possible that you became an accidental landlord? You might be surprised by the number of instances that happen. If you are not yet ready to let go of your home or are unable to sell it, renting your house out could be a lucrative option for you. It is important to understand the different accidental landlord tax implications involved with becoming a landlord.

What Is an Accidental Landlord?

People who become accidental landlords have accommodation to rent out due to a change in their circumstances rather than because they are buying a house, apartment, or apartment complex with the intention of renting it out.

Occasionally, you will inherit a property before you'd thought. Or maybe your job will force you to relocate, but you can't sell your home. Some homeowners have become accidental landlords: renting out their property even though it was not their intention to do so. So, landlords receive rental income from tenants and are responsible for paying tax on rental income.

What You Should Do to Stay On Top of Your Income and Expenses?

Homeowners usually receive from their mortgage company the information they need for their tax returns, such as the mortgage interest they paid and, if they have an impound account, the property taxes and insurance they paid. Landlords, however, may encounter different circumstances. Even though you'll still receive the same information regarding your mortgage payments as before, once you begin renting out your home you will also be able to take advantage of other accidental landlord tax breaks.

In addition to keeping track of your expenses, you'll also need to keep track of your income such as rent checks. You can avoid this by using an online accounting software solution that tracks your expenses and logs any evidence, such as receipts or checks. To keep track of any documents or statements related to the property, you can also establish a folder management system.

What Type of Deductions Are Available Against Accidental Landlord Tax?

If you own a rental property, you can generally deduct all eligible expenses you incur during the course of its operation that will help lower your tax bill. Since you are a landlord, your deduction limitations are a lot less strict than they were when you lived on the property.

Travel Expenses

As part of your business activities, you can also deduct travel expenses to and from the rental property. Depending on how you calculate your auto and travel expenses, you'll need to track your mileage or actual expenses. 

For expense purposes, keep a log of your trips, which should include the date, destination, miles traveled, etc. Calculate your mileage expense deduction by totaling your business miles driven over the year and multiplying by the IRS-provided mileage rate which is $0.56 cents per mile. 

Depreciation Expenses

Deductions for depreciation allow the cost of property to be recovered over time. The effect is to allow the cost of the house to be amortized over its useful life. The land portion of your home cannot be depreciated over 27.5 years, but the home can be depreciated over that time period. If you take advantage of depreciation, you can save a considerable amount of money in taxes.

Sale of Rental Property

In the event you're planning to sell your rental property, you should take a few additional factors into account. For sellers who meet the requirements, the capital gains tax exclusion can be claimed if your home was once your primary residence. In addition, you will also be liable for any depreciation recapture owed.

Applicable Conditions on Capital Gain Exclusion

Capital gains tax may be excluded under the special capital gains exclusion in the tax code

• As a single person, you can claim up to $250,000 in capital gains tax
• A couple filing jointly can claim up to $500,000 of capital gains tax

To qualify for this exemption, you need to have owned and lived in the house for two years out of the past five. A home that has appreciated significantly may be eligible for this exclusion, which is quite beneficial if you qualify.

Other Deductions Available Against Accidental Landlord Tax

If you spend money on managing or maintaining the rental property, then this money is generally tax-deductible, such as the following costs:

• cleaning
• repairs
• maintenance
• legal fees
• advertising
• auto
• commissions
• insurance
• other professional fees
• mortgage interest
• supplies
• taxes
• utilities

You should keep receipts for any expenditure you make on your rental property or managing it, and you should write down which expenditures were related to it. Make sure you sort your expenses into the above categories at the end of the year so you can claim them on your tax return.

Hire A Tax Professional

You may not know that there are several ways you can cut your taxes if you become an accidental landlord. For accidental landlord tax deductions available to you based on your situation, it is always recommended that you contact a professional tax accountant.