Creating a boarding house or renting to several individuals can increase your income. Many people convert their large home into several rentals to pay off the mortgage. If you are considering going into the rental business think of the tax implications first. There are several things that you should know about tax on different properties.
Living in the house two years decreases sales
The capital gains tax on a home that you live in qualifies for an exclusion if it is your primary residence. For a residence to be a primary residence, you must have lived in the home for two years out of the past five years. You can rent the home the other three years and still have a lower tax bill at sales time.
You get repair deductions
One of the bright sides of renting your home is that you now qualify for landlord deductions. Making improvements on the home while it is a rental is a tax deduction. Any maintenance or repairs that you must make to the property also qualify as a deduction. The rent, however, must be reported as income. This can mean that tax time benefits are low for some landlords.
Capital gains exclusion
The gains exclusion for singles is $250,000 and for those who are married, filing jointly it is $500,000. For this reason, you may consider living in your rental property in the two years before you plan to sell, in order to decrease the income on the property sale that could take you up to another tax bracket.
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