Summary of What This Blog Covers
- Renting your home removes the homestead exemption and raises property taxes.
- Rental income is taxable, even if it only covers expenses.
- Depreciation helps now but can trigger taxes later when you sell.
- Treat your rental like a business with the right structure and tax planning.
So, you’re ready to rent out your home.
Maybe you’re moving into your dream house. Maybe you’re relocating for work. Or maybe you’ve realized your property could be generating income instead of sitting on untapped equity. Whatever the motivation, turning your primary residence into a rental property can be a brilliant move if you do it with a tax strategy in place.
Here’s the hard truth: converting your home into a rental may open the door to a steady stream of income, but it also invites property tax increases, IRS reporting requirements, depreciation planning, and capital gains tax considerations when you sell.
At Insogna CPA, a top-rated Austin, Texas CPA firm, we specialize in guiding clients through real estate transitions just like this one. Whether you’re renting for a year or a decade, the difference between financial success and frustration lies in how you handle taxes.
Let’s walk through what really happens. From your homestead exemption to depreciation recapture, when your home stops being personal and starts becoming business.
Part 1: What Happens to Your Homestead Exemption?
If you’ve owned and lived in your home, chances are you’ve benefited from a homestead exemption. This local property tax break reduces the assessed value of your home, protecting you from sharp increases in your annual property tax bill.
But once your home becomes a rental, that benefit is revoked.
Why This Matters:
- Your property will be taxed at its full market-assessed value, which means a higher annual property tax bill.
- The homestead cap on assessed value increases (often 10%) also disappears, allowing your taxable value to spike more aggressively.
- In high-growth areas like Travis County (Austin, Texas), your taxes can increase by thousands within a single reassessment cycle.
Potential Penalties:
If you forget to notify your county that your home is no longer your primary residence, you could face:
- Back taxes (for the years you wrongly claimed the exemption)
- Interest and penalties
- Possible audits or public record flags
Action Steps:
- Call your county tax assessor’s office and formally withdraw your homestead exemption.
- Update your budget and rental pricing strategy to account for the increased property tax burden.
- Consult with an Austin tax accountant or CPA near you to help you structure these costs into your broader investment plan.
This shift can feel small, but it often turns into one of the largest unexpected expenses for new landlords.
Part 2: Rental Income is Fully Taxable (Even If You’re Not “Making a Profit”)
The next big misunderstanding we see? Assuming that rent only becomes taxable if it exceeds your mortgage or costs.
That’s not how the IRS thinks.
Here’s the IRS View:
- Rental income is taxable regardless of whether it covers your expenses.
- Even if you’re collecting just enough to break even, you still have to report 100% of the rent collected.
- It doesn’t matter whether you deposit the funds into a personal account or reinvest it, the IRS considers it reportable income.
Examples of Taxable Rental Income:
- Monthly rent
- Prepaid rent (applies to the year it’s received)
- Late fees
- Pet rent and fees
- Security deposits retained for damage or unpaid rent
- Application fees
- Lease termination payments
If you collect it and keep it, it’s taxable.
What You Can Do:
- Offset rental income with deductions (see Part 4 below).
- Maintain organized documentation of rent collected, repairs, expenses, and more.
- Work with a tax preparer near you who knows how to optimize Schedule E reporting for residential rental property.
If you’re relying on TurboTax and guesswork, you’re likely missing deductions or misreporting your numbers.
Part 3: Depreciation Is Your Best Friend Until You Sell
Now here’s where we turn the tax code into an asset.
Once your home becomes a rental, you can begin depreciating the building portion of the property over 27.5 years. This is one of the most powerful, underused tools in the landlord’s tax arsenal.
How Depreciation Works:
- The IRS lets you deduct the building value (not the land) over time.
- That deduction reduces your taxable rental income even though it doesn’t impact your cash flow.
Example:
Let’s say your home is worth $400,000, and the land is worth $100,000.
That leaves $300,000 for depreciation.
$300,000 ÷ 27.5 years = $10,909 annual deduction
Every year, you’re reducing your taxable income by over $10,000, even if your property is appreciating in real-world value.
But There’s a Catch: Depreciation Recapture
When you sell, the IRS “recaptures” the tax savings. You’ll owe tax on the depreciation you claimed, up to 25%, even if the property loses value.
Action Plan:
- Track all depreciation with the help of a certified public accountant near you.
- Use a 1031 exchange if you plan to reinvest in another property and want to defer the tax.
- Consult your tax advisor in Austin to model future sale scenarios. Timing matters.
At Insogna CPA, our clients use depreciation to strategically reduce income today while preparing for the long-term impact tomorrow.
Part 4: The Deductions You Should Be Claiming (But Might Not Be)
Owning a rental property means you now qualify for a wide range of business deductions and these write-offs can drastically lower your taxable income.
But you need to track them meticulously.
Common (and Valuable) Rental Property Deductions:
- Mortgage interest
- Property taxes
- Insurance premiums (landlord policy, umbrella, hazard)
- HOA dues
- Utilities paid by you
- Repairs and routine maintenance
- Travel expenses (mileage for inspections, maintenance, etc.)
- Depreciation (building only)
- Legal fees and accounting services
- Property management fees
- Home office deduction (if you manage the property from home)
The Role of Your CPA:
This is where having a real estate-focused CPA makes a difference. A small business CPA in Austin will not only help you claim what’s valid but also categorize and track your expenses for audit protection.
Many deductions are lost due to lack of documentation or improper classification. Our team at Insogna CPA helps clients maintain accurate, audit-ready records from day one.
Part 5: What About Capital Gains When You Sell?
One of the biggest benefits of selling a primary residence is the Section 121 exclusion, which allows you to exclude up to:
- $250,000 (individual)
- $500,000 (married couples)
from capital gains taxes if you lived in the home for two of the last five years.
But Renting Changes the Clock
- The longer you rent it, the closer you get to losing this exclusion.
- After three years of it no longer being your primary residence, you likely won’t qualify.
What to Do:
- Sell before the three-year window closes if you’re planning to cash out.
- Consider a 1031 exchange to defer capital gains if you plan to reinvest.
- Talk to a certified cpa near you who can time and model both scenarios.
Part 6: Owning Property or Accounts Abroad? You May Need to File FBAR
Do you own international rental property? Use overseas bank accounts to manage expenses?
If the aggregate balance in your foreign accounts exceeds $10,000 at any point during the year, you may need to file an FBAR (Foreign Bank Account Report).
FBAR Filing Applies To:
- Foreign checking, savings, or investment accounts
- Foreign pension or retirement accounts
- Business accounts where you have signatory authority
Penalties for Noncompliance:
- Up to $10,000 per violation, even if it’s unintentional
- Steeper penalties for willful violations
Talk to a tax accountant near you, enrolled agent, or Austin CPA firm familiar with FBAR filing and FATCA if you’re dealing with international holdings.
Part 7: Structure Your Rental Like a Real Business
Many first-time landlords operate under their personal name and never separate their finances which leads to messy bookkeeping, missed deductions, and legal exposure.
Consider a Proper Structure:
- LLC: Offers liability protection, helps separate personal and business finances
- Trust: Good for legacy planning or estate protection
- S-Corp: Rarely used for rentals, but may benefit short-term operators
At Insogna CPA, we assess your goals and recommend the right structure based on your income, portfolio, and risk tolerance. This isn’t one-size-fits-all tax planning, it’s built around your life.
Part 8: This Is a Business. Start Planning Like One.
Taxes don’t just happen once a year. Smart landlords plan all year long. That means:
- Making quarterly estimated payments
- Projecting your income and expense ratios
- Preparing in advance for a sale or reinvestment
- Knowing when to take deductions now and when to defer
The best investors don’t react, they plan. And they do it with a team that understands the landscape.
Work with Insogna CPA: Austin’s Real Estate Tax Experts
At Insogna CPA, we help homeowners, small business owners, and real estate investors build wealth through tax-smart real estate decisions.
Our team:
- Helps you set up your rental the right way
- Ensures accurate reporting and deduction tracking
- Prepares you for depreciation recapture and capital gains
- Provides FBAR compliance and 1031 exchange consulting
- Guides your business structure and long-term strategy
If you’re looking for a CPA in Austin, Texas, who speaks fluent real estate, you’re in the right place.
Ready to Rent Smart? Let’s Talk Strategy.
Don’t rent your home without knowing the tax impact. Don’t guess your deductions. And don’t miss out on thousands in savings because you’re using the wrong filing method.
Book a consultation with Insogna CPA today.
We’ll help you protect your rental profits, reduce your tax liability, and build a solid financial foundation for the future.