Some homes are purchased solely to serve as a rental house. The process of buying a rental property is very similar to purchasing a personal residence. The similarity ends, however, after a rental house is purchased. After that, it may take several weeks to place a newly purchased home in service as a rental property.
The length of time required to prepare a home for rental depends on its condition when purchased. You may need to perform certain repairs to ensure that the property meets the expectations of potential renters. It may take several days to transfer the title of the property to yourself. You will also need to take the time to decide what terms to include in a rental contract.
Start of depreciation
The largest tax deduction for owning a rental house is usually depreciation. Land is not depreciating asset, but the remaining cost of residential rental property is depreciated over 27.5 years. After you purchase a rental house, the deduction for depreciation cannot be taken until the property is fully available for rent.
The depreciation deduction begins when your rental house is placed in service, regardless of whether there is an occupant renter. In the first year that you own a rental house, the depreciation deduction may be for less than a full year. Depreciation for a rental house begins in the month the property is placed in service. In subsequent years, a deduction for a full year may be taken.
Depreciation as a tax loss
Even if a rental property produces a positive cash flow, the depreciation deduction may result in a loss for tax purposes. If you actively manage a rental house that you own, you may use up to $25,000 of a loss to offset sources of taxable income. You don't have to perform repairs and maintenance yourself. To be considered an active manager, you need to remain responsible for the daily oversight of the property.
Because depreciation begins only after a property is placed in service, you might want to focus your home search on houses in top condition. By placing the property in service as soon as possible, the depreciation deduction is maximized in your first year of ownership. On the other hand, a lower purchase price might justify taking more time to perform repairs.
The search for a rental property can take as long as a search for a personal residence. Contact a real estate agent for more information on homes listed for sale in your community.