Here’s a scenario: Let’s say you’re moving out of your current home. Maybe to downsize, maybe to someplace with better weather, whatever. Given that real estate seems like a pretty good inflation hedge, you might be reluctant to sell your soon-to-be former abode. Plus, according to a recent estimate, rents just hit a record high, with the national median rent up 14.1% year-over-year. Wow. So, should you convert your place into an income-producing rental property instead of selling? Maybe. Here are the federal income tax plusses and minuses to consider.
What you can write off for a rental property You can deduct mortgage interest and real estate taxes on a rental property. You can also write off all the standard operating expenses that go along with owning a rental property: utilities, insurance, repairs and maintenance, yard care, association fees, and so forth. Finally, you can also depreciate the tax basis of a residential building (not the land) over 27.5 years using the straight-line method, even while it is (you hope) continuing to increase in value. The property’s initial tax basis for depreciation purposes usually equals the original purchase price, minus the purchase price allocable to the land, plus the cost of improvements, minus any depreciation write-offs that you’ve claimed over the years (say from having a deductible office in the home). Depreciation deductions are great because they …