The Comprehensive California Landlord Guide
Comprehensive Manual for Becoming a Landlord in California: Including Benefits, Tax Deductions, and Obligations
Are you thinking about converting your home into a rental property or perhaps buying a second home for investment purposes? You’re not alone. Real estate has been many investors’ top choice for building value over time. The unique opportunity for a property to deliver a steady income stream in the form of rents while appreciating in value attracts both professional and amateur investors the world over. Tax benefits such as mortgage deduction and homeowners allowances also contribute to the growing appeal of property ownership as an investment vehicle. However, a word of warning to the many would-be landlords out there: it’s trickier than it sounds! This guide covers the ins and outs of managing a rental property from choosing the right tenants to property management and legal responsibilities. We will first discuss several financial benefits of managing a rental property.
Homeownership, though a large responsibility, comes with numerous tax deductions to reduce the cost of property ownership. The below items are benefits afforded to homeowners by the IRS and represent some of the benefits of a rental property aside from rental income and value appreciation.
Home repair: including any expenses required to keep the home in habitable condition. This includes painting, plumbing, roofing, and all related costs such as labor and even gas to get to-and-from the hardware store.
Depreciation: The MACRS, or modified accelerated cost recovery system, is the primary tool for calculating depreciation in residential homes and apartments. Simply put, depreciation costs are deducted over 27.5 years. This applies only to the buildings and improvements on the land as the land itself cannot be depreciated. For example, a rental structure valued at $500,000 will afford a tax deduction of more than $18,000 annually. Improvement costs such as new roofs, decks, or patios can also be recovered through depreciation.
Home office: if part of the property is regularly used exclusively for business, you qualify for a home office deduction. This business could even be for managing the rental property itself! Additionally, expenses for this section of the home such as office furniture, supplies, and related utilities may also be deductible. Certain items may be depreciated as well.
Insurance: Many costs of insuring a rental property are claimable, including most landlord insurance such as fire, liability, building, and contents. Be sure to speak with an insurance expert to assure that your coverage is appropriate for your needs, as standard homeowner’s policies do not cover tenant losses.
Property management expenses that are reasonable and necessary can also be deducted. This includes but is not limited to advertising, interest, insurance, taxes, utilities, and maintenance. Professional services may also be included, such as accounting, professional property management, real estate lawyers, and even marketing.
Travel expenses related to managing the income property including driving to meet tenants, collect rent, or purchase repair materials all qualify as deductions.
“Switching:” You are able to sell your property and avoid paying taxes if you reinvest the proceeds from the sale into another property. This technique is called ‘switching’ or tax-free exchange. This is especially helpful if you are looking to upgrade your rental property by capitalizing on market adjustments and price fluctuations.
Please note that it is vital to keep well-organized and accurate records to substantiate deducted expenses. If you cannot show document evidence supporting your claims, the IRS will disallow the expense and you may be subject to penalties. Receipts will inevitably fade, so be sure to photocopy or scan them to save in your records.
Though the financial advantages of a rental property are numerous and substantial, would-be investors and property managers should note that there are also many responsibilities associated with being a landlord. These range from legal risk exposure to financial obligations.
Mortgage: Property owners are responsible for the related mortgage payments regardless of the property’s condition. Vacancies and late payments may end up disrupting the steady cash flows from the property, so have some extra savings set aside for these issues.
Legal obligations: Landlords are responsible for understanding and following laws and regulations related to managing a rental property. Lawsuits and legal expenses caused by misunderstanding the law or a problem tenant may damage the profitability of your venture.
Availability: Any emergencies related to the property are the owner’s immediate responsibility. Floods, fires, or appliance issues all require instant response and management, so if you want to distance yourself from late night phone calls and the like be sure to designate an individual or management company to take action on your behalf.
Safety and Habitability: Landlords are required to maintain the property from top to bottom. You may be liable for tenant or visitor injuries resulting from unsafe conditions. Required minimum action includes:
-Roofing, stairs, walls, hallways, and floors must all be maintained
-Electrical, plumbing, heating, ventilation, and air conditioning should be intact
-Tenants must have access to clean, running and hot water and heat
-Garbage containers and removal must be provided
-Toxins such as lead paint and asbestos are the landlord’s responsibility
-Pests such as rodents and insects must be eliminated
The decision to become a landlord is a big one, and comes with myriad legal, financial, and professional responsibilities. However, the gains can be notable. Be sure to evaluate the benefits and costs accordingly and interface with the best real estate agents, accountants, and legal advisors you can find to assure that you are protected and make the right decisions moving forward.
Written by Gregory Lyons in Association with Harris Team Real Estate
3305 W. Wyoming Cir, Tampa, FL 33611
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