Becoming a landlord is a great way to begin creating an income for the future. It can be daunting, though, to consider everything involved—especially the finances—in buying and maintaining a second house.
One solution many potential landlords have found is to purchase what's known as an owner-occupied duplex. This duplex—a building with two homes in one structure—is "owner-occupied" when you live in one half and rent out the other. With rental income and only one overall house to keep up, you could reach profitability much sooner than with many traditional rental setups.
If a duplex is right for you and your rental dreams, it's important to keep a few things in mind when it comes to the maintenance, taxes and finances. Here are some tips to remember when planning your duplex ownership.
Keep Separate Records
First, it's vital that you maintain three sets of separate records: expenses for the building as a whole, expenses specific to the rented space and expenses unique to your own home portion. This is because you will need to declare the income and use the expenses in different areas of your taxes when you file. Also, depreciation will be different for the rented section and the owner-occupied space.
Rental Expenses
As a landlord, you will complete Schedule E to accompany your taxes each year. This form declares your rental income and allows you to reduce your tax due by claiming any legitimate rental expenses.
Anything you paid specifically for the rented unit can usually be claimed—including advertising, cleaning, maintenance, utilities for the rental, management fees and supplies.
You can also deduct depreciation, which is a portion of the home's value claimed each year in order to reduce tax liability. To calculate annual depreciation, divide half the home's cost by 27.5 (the number of years you may claim this depreciation).
Personal Deductions
Your personal deductions change with the purchase of a duplex. Whereas you would normally deduct the entire cost of your mortgage and insurance on Schedule A as an itemized expense, you will now only deduct half of these items as personal expenses.
The other half of the insurance bill will become a rental expense and depreciation will replace the mortgage deduction for the business half of the bill.
Shared Expenses
Expenses for the whole building include things like roof repair, driveway maintenance, lawn maintenance and utilities. Many of these costs are things that you normally couldn't deduct on your personal home. However, because the rented section of the duplex is a business, you should keep track of such bills since you may be able to claim half of them as rental expenses.
When deciding to purchase a duplex for renting as well as setting up a system for record-keeping, it may be best to work with a qualified tax preparer (like Bauer & Associates LTD). While you may be able to do this on your own, you can save a lot of headaches (and likely some taxes) by seeking help. But, whatever you choose, you're own your way to developing a lifelong income stream as a landlord.
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