If you're looking for some extra income, renting out part or all of your home can be a great way to earn a little on the side. But if you aren't aware of the financial implications, you could end up making less or no income. So, what should you keep in mind when deciding how often to rent your home to travelers? Here are the 3 biggest questions to answer before starting.
What's Taxable?
Most rental income is required by the IRS to be reported and is taxable. The exception to this rule is income earned from only renting out your personal home for 14 days or less each year. So, if you only want a small supplement to your earned income and don't want the hassle or expense of paying taxes on it, keeping things carefully under the 14 day rule is the way to go.
And if you want more money than that? Plan ahead for including the income on your personal income tax return each spring. You do this by completing and attaching IRS Schedule E. The good news, though, is that because you must declare rental income (over 14 days), you can also deduct expenses. These deductible expenses include maintenance, listing fees, cleaning and even a portion of the utilities (equal to the percentage of the home being rented out). To begin with, you may need to work with a professional tax preparation service to navigate the intricacies of how to properly deduct expenses on the Schedule E. Contact a business, such as Tri Check Inc, for more information.
Are You Covered?
Renters can damage property, suffer losses and have accidents. You should ensure that your insurance coverage will care for claims that could come up. Homeowner's insurance may not cover situations in which you are not personally living in the home or if the home is left vacant for any stretch of time. In this case, you may need to purchase landlord insurance or a rider for your current policy. It's best to talk with your insurance agent once you've decided what type of rental you want to pursue.
Do You Have Savings?
While you might be considering renting out a room or a vacation home in order to increase your monthly income, it's important to have some money put aside before starting. Why? As mentioned, renters can damage your property. They also have expectations about the condition of the property that you must adhere to (such as a working hot tub or pool or good quality appliances) no matter what. There are often costs associated with renting, including listing fees, website maintenance and cleaning expenses. And, finally, you may need to cover slow months when you're not able to rent the space as expected. For these and other surprise expenses, it's best to have a healthy emergency or rental fund available for use.
Once you've determined how you want to handle the taxes, the insurance coverage and the emergency costs of renting out your home, you'll be in a good position to begin this new adventure. And whether you do it just a few days or for the whole year, you can make the best decisions and reap the most benefits.
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