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Family finances: How do I convert my house to a rental property?

Kiplinger's Money Power

A real estate agent who has experience leasing properties is a good place to start. Be prepared to meet prospective renters so you can ask questions that aren't covered by boilerplate applications. The signed leasing agreement should list the expenses the tenant is responsible for, such as trash collection, utilities and landscaping.

If you're moving to another city, you'll probably need to hire someone to manage the property. Ask your real estate agent and other landlords for referrals. The National Association of Residential Property Managers (http://www.narpm.org) offers a tool to search for property managers in your area. Fees vary depending on the services provided, but in general you can expect to pay 10 percent of the monthly rent, according to ManageMyProperty.com.

When interviewing property managers, ask them how they handle emergencies. Do they have someone to deal with routine problems, such as a stopped-up toilet? Will the firm contact you before making repairs that exceed a specified amount of money?

Call your insurance agent before you hand over the keys. In most cases, your rates will drop because rental property insurance covers the structure but not personal belongings. If, however, you plan to leave some of your belongings, such as large appliances, you may need additional coverage. Make sure you maintain -- or even increase-- your personal liability insurance to protect yourself against tenant lawsuits. At USAA, for example, liability coverage for $1 million in damages costs about $30 per year. Encourage your tenant to buy renters insurance; some landlords require renters insurance because tenants who have coverage may be less likely to sue.

Rental income is taxable at your ordinary income rate, so don't overlook deductible expenses that will lower your tax bill. Property-management fees, insurance, mortgage interest, property taxes, cleaning services and repairs, plus travel expenses to make repairs or collect rent, are all deductible.

As a landlord, you're also allowed to deduct depreciation. Depreciation is based on the lesser of the fair market value of your home at the time you convert it to a rental or your tax basis, which is basically the amount you paid for the home plus improvements and additions. In either case, you must subtract the value of the land. Once you've established the appropriate value, divide it by 27.5 (the tax code assumes residential real estate has a useful life of 27½ years) to calculate a full year's deduction.

There's a catch. When you sell your home, you'll have to pay tax on the amount you claimed for depreciation at a maximum rate of 25 percent. Consider getting help from a tax professional.

(Sandra Block is a senior associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.)

(c) 2014 Kiplinger's Personal Finance; Distributed by Tribune Content Agency, LLC.

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