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You want extra income and you just happen to have extra space in your house. What could be more logical than turning a portion of your home into a small apartment and renting it out?
For owners, wasted space gets used, work is minimal, and income is steady. For renters, conditions are friendlier than living in a massive apartment complex, and housing choices are expanded.
To be clear, this is not simply a bedroom for rent. Instead, a portion of your home is transformed into a fully functioning, independent area with a bedroom, bathroom, sitting room, and kitchenette.
But before you log onto Craigslist to write up a listing, understand all of the implications.
For many homeowners, rental revenue sufficient to break even on the mortgage is good enough. Others want this, and they want to turn a profit, too.
Few homeowners wishing to rent out part of their home already have a space that is rental-ready. In most cases, you will need to make alterations to your property.
Nearly every owner of a traditional small business is aware of the need to pay taxes. Every small business – a coffee shop, eBay store, tour business, or restaurant – must report income and pay taxes on it.
Many homeowners who rent out a part of their home lose sight of the fact that they, too, are running a small business; the only difference is that the business is located in their own home.
This is not under-the-table income; this is above-board income that is subject to a straight marginal tax rate. For example, if you are in the 20 percent tax bracket and earn $1,000 per month from your rental, you must pay $2,400 per year in taxes.http://www.investopedia.com/financial-edge/0312/how-renting-out-your-spare-room-can-backfire.aspx
But tax benefits can be enticing. One unexpected benefit of renting out a portion of your home is tax deductions. The U.S. Internal Revenue Service (IRS) allows expenses related to the rental portion of your property to be deducted on your annual taxes.https://www.irs.gov/publications/p527/ch04.html#en_US_2015_publink1000219159
Another way to look at it is that extra space in your home that ordinarily would be vacant is not only producing extra income but can share your tax burden. Expenses that can be shared include the following:
Expenses that apply only to the rental portion are wholly deductible, such as a dedicated phone line, repairs, decorations, window unit ACs, permanent furniture, etc. As long as it applies only to the rental area, it is 100 percent tax deductible.http://www.nolo.com/legal-encyclopedia/tax-issues-when-renting-out-room-your-house.html
Condo owners may have restrictive covenants. As an owner of a single-family residence, you have no covenants unless a housing association controls your area.
Because of Airbnb, city governments are taking sharper notice of home rentals, even partial home rentals. Some cities have rental registration systems that include occasional inspections. Other cities, in an attempt to limit boarding or rooming houses, have restrictions on the number of “unrelated” people who may live in the same residence.
Begin with a visit to your city’s housing department to discuss restrictions on partial home rentals.
You are bound by fair housing laws, just like any other landlord, meaning that you can specify requirements like no pets or no smoking, but you cannot discriminate on the basis of race or gender.
You will stay in good legal standing if you treat the landlord-renter relationship with the same objectivity and distance as you would if you were renting an off-premises apartment.
For example, if your tenant shows up at your door unannounced to discuss a matter, this is a matter of inconvenience for you that should be defined in the rental contract. But if you were to attempt to improperly enter the apartment, this becomes a legal issue that impinges on the tenant’s rights.http://www.moneycrashers.com/good-landlord-tips-advice-responsibilities/
Repairs can be divided into two areas: those you need to do immediately by law and those you need to do within a reasonable amount of time.
In both areas, notice of at least 24 hours must be given, and you can only enter during “normal business hours,” such as Monday-Friday from 9:00am to 5:00pm.
By law, you are required to keep the apartment in “habitable condition,” a loose definition that generally means:
Because these are repairs that touch on matters of health and safety, you need to get on these repairs within a day or two.
Torn window screens, leaky faucets, unpainted rooms, or constantly running toilets are more nuisances than life-threatening disasters. The “reasonable amount of time” standard for these is usually 30 days.
However, because the apartment is intertwined with your own living space, it is highly recommended that you apply the stricter standard – 24 to 48 hours. After all, water from the slowly draining bathtub in the rental apartment may work its way into your own living quarters.
Many homeowners, starry-eyed and tempted by the prospect of “passive income,” find that renting out a part of their home takes an emotional toll that they did not expect.
Because renting out part of your home is an unusual take on the typical landlord-renter arrangement, here are three potential problems you may not have considered – with suggested solutions.
1. Protect Your Own Privacy: What are your “business hours”? Can your tenant knock on your door at 2:00am to discuss the next month’s rent? Specify your privacy arrangements in the rental contract.
2. Manage (or Limit) Common Areas: Because running separate power, water, and sewer lines is prohibitively expensive, most would-be landlords share these services with the renters. Some even share more personal areas, such as the kitchen and laundry room. While you will save money by sharing these services, realize that the trade-off is a loosening of boundaries.http://www.moneycrashers.com/renting-out-room-in-house/
3. Realize That Passive Income May Require Some Work: If you expect your work to end the moment you sign the rental contract, you will be sorely disappointed. Renting out part of your home does require some work. Conditioning your mind to this prospect is vital to making this arrangement a happy and prosperous one for you.
Renting out a part of your home is a great way to make extra income. By keeping in mind start-up costs as well as monthly expenses, you can ensure that you not only cover your monthly mortgage but turn a profit, too.
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