Summary of What This Blog Covers
- Rental income is taxable even if it just covers the mortgage.
- Losing your homestead exemption can increase property taxes.
- Depreciation reduces taxes now but may trigger recapture later.
- Missed deductions, poor planning, or wrong entity setup can cost you.
So, you’re converting your personal home into a rental property.
Maybe it’s time for more square footage. Maybe you’re chasing that out-of-state career opportunity. Maybe your equity matured faster than expected, and now you’re thinking, “Why sell when I can collect rent and watch the value rise?”
It’s a solid financial strategy but let’s not sugarcoat it. Once your home becomes a rental, your tax obligations shift. The tax code gets pickier. The IRS starts watching. And what was once your cozy little bungalow becomes a full-blown income-producing asset.
At Insogna CPA, we specialize in helping entrepreneurs, real estate investors, and small business owners—just like you—navigate this exact transition. We’re not just any CPA firm in Austin, Texas. We’re your behind-the-scenes financial co-pilot, making sure your rental doesn’t turn into a tax mess.
Let’s walk through the top tax mistakes people make when converting their home into a rental and more importantly, how to avoid every single one of them.
Mistake 1: Assuming Rental Income Isn’t Taxable If It Just Covers the Mortgage
This is the number one myth we see with first-time landlords. People think, “If the rent just covers the mortgage, I must be breaking even so there’s no income to report, right?”
Wrong.
Here’s the truth: the IRS isn’t concerned with your mortgage payment. In their eyes, every dollar of rent you collect is taxable income regardless of your loan balance, monthly costs, or whether you personally turn a “profit.”
What Counts as Taxable Rental Income:
- Monthly rent payments
- Application fees
- Pet deposits and pet rent
- Late fees
- Early termination penalties
- Security deposits you retain (for damages or unpaid rent)
If your tenant gives you money and you don’t return it, the IRS wants to see it on your return.
What You Can Do:
Offset that rental income by tracking and deducting every legitimate expense (we’ll get to that below). But do not assume zero tax liability just because your tenant’s check gets routed straight to the bank.
Work with a CPA in Austin, Texas or a tax advisor near you who knows how to properly structure rental income reporting on your Schedule E. If you don’t, you risk penalties, audits, or overpaying taxes you legally could have avoided.
Mistake 2: Forgetting That Your Homestead Exemption Is Going Away
When your primary residence becomes a rental, one of the first and often forgotten financial consequences is the loss of your homestead exemption.
This exemption typically lowers your property taxes while you live in the home. But once you no longer claim it as your primary residence, that exemption disappears and your property taxes will likely increase, sometimes significantly.
What You Should Know:
- The increase could be a few hundred dollars per year or several thousand, depending on your location.
- You may also be subject to different local assessments or landlord-specific taxes and fees.
How to Prepare:
- Contact your local appraisal district or tax assessor to confirm what your new taxable value and rate will be as a rental.
- Build that increased cost into your cash flow projections.
- Adjust your rental pricing strategy accordingly to maintain profitability.
Partnering with an Austin accounting firm or a small business CPA in Austin ensures your pro forma includes all real costs not just mortgage and insurance.
Mistake 3: Skipping or Misapplying Depreciation
Depreciation is one of the greatest tax advantages real estate investors enjoy. Yet it’s also one of the most poorly understood.
The IRS allows you to depreciate the value of your building (not the land) over 27.5 years for residential properties. This gives you a non-cash deduction each year, meaning you don’t spend money to get the write-off. It just reduces your taxable income.
Real-World Example:
You convert a home worth $400,000 into a rental. Land value is $100,000, so you depreciate $300,000.
$300,000 ÷ 27.5 years = $10,909 per year in depreciation
That’s $10,909 you don’t pay taxes on every single year. Even if the property is appreciating in the real market.
The Catch: Depreciation Recapture
When you sell the property, the IRS will want to “recapture” all the depreciation you claimed. This means you’ll be taxed on it at a special 25% rate, separate from capital gains.
This can shock landlords who didn’t plan ahead.
The Fix:
- Depreciate now to enjoy the annual savings.
- Plan for future recapture with your tax accountant near you.
- Use tools like a 1031 exchange to defer those taxes when you sell and reinvest in another property.
At Insogna CPA, our team of certified public accountants and chartered professional accountants help investors apply depreciation the smart way. Maximizing its benefits today while planning for tomorrow’s obligations.
Mistake 4: Missing Deductions Because You Didn’t Track Properly
Let’s say this as clearly as possible: if you’re not tracking every expense related to your rental, you’re overpaying the IRS.
Owning a rental comes with a long list of deductible expenses. But the IRS won’t guess. You have to provide documentation.
Common Deductible Rental Expenses:
- Mortgage interest
- Repairs and routine maintenance
- Property taxes
- Insurance premiums (homeowners, liability, umbrella)
- HOA fees
- Utilities paid by the landlord
- Property management fees
- Legal fees
- Tax preparation services near you
- Travel costs (mileage, tolls, parking) when visiting or managing the property
You can even deduct depreciable improvements, though those are written off over time.
Pro Tip:
Use accounting software, or work with an Austin tax accountant who can help categorize every receipt, invoice, and transaction correctly. Many of our clients come to us after trying to DIY and realizing they missed out on thousands in deductions.
Mistake 5: Operating Without the Right Legal or Tax Structure
While it’s legal to operate your rental property in your personal name, it’s often not optimal—either for liability protection or tax efficiency.
Entity Options for Landlords:
- LLC (Limited Liability Company) – Keeps business and personal finances separate, offers liability protection, and simplifies ownership if there are multiple partners.
- S-Corporation – Rarely used for long-term rentals, but sometimes useful for short-term rental operators with higher income.
- Trusts – Useful for estate planning and minimizing taxes upon inheritance.
The Mistake:
Not consulting a licensed CPA or certified accountant near you before choosing your structure or worse, setting up an entity and filing the taxes incorrectly.
The Fix:
At Insogna CPA, we evaluate each client’s risk tolerance, portfolio size, and long-term goals to determine the most advantageous setup. Your entity structure can directly impact your tax rate, your audit risk, and your asset protection strategy.
Mistake 6: Ignoring FBAR Rules If You Own Property or Hold Money Abroad
If you have foreign bank accounts connected to your rental business—say for managing international property—you may have to file an FBAR (Foreign Bank Account Report).
Filing Is Required If:
- You hold $10,000 or more (combined across all foreign accounts) at any point during the year
- You have signatory authority over a foreign account
The Penalty for Non-Compliance:
Up to $10,000 per unreported account per year. Willful violations? Even higher.
If you’re investing abroad or managing foreign rental income, you need a taxation accountant or enrolled agent familiar with FBAR filing and FATCA regulations. This is not the time to rely on a generalist.
Mistake 7: Treating Tax Planning Like a Once-a-Year Event
Tax planning is not an annual chore. It’s an ongoing business function. Real estate investors who treat taxes as an afterthought pay more and grow slower.
What You Should Be Doing:
- Making quarterly estimated tax payments
- Meeting regularly with your CPA accountant near you to update your strategy
- Adjusting for new income, expenses, or changes in your portfolio
- Preparing for upcoming sales or 1031 exchanges months in advance
At Insogna CPA, we don’t do surprise tax bills. We plan every quarter like it’s the playoffs and we make sure our clients win.
What Happens If You Get It Wrong?
If you:
- Underreport your income
- Misclassify your expenses
- Miss filing deadlines
- Ignore recapture rules or FBAR obligations
- Use the wrong structure
You’re not just looking at missed deductions. You’re looking at:
- IRS audits
- Penalties and interest
- Higher tax bills
- Lost time
- Legal vulnerability
- Decreased returns
That’s why working with a CPA certified public accountant or certified general accountant who specializes in rental real estate is non-negotiable.
How Insogna CPA Helps First-Time and Experienced Landlords Succeed
As a premier CPA firm in Austin, Texas, we help rental property owners:
- Accurately report rental income
- Claim every deduction
- Maximize depreciation benefits
- Strategize for depreciation recapture
- Navigate 1031 exchanges
- File FBAR and international disclosures
- Set up entities for optimal protection
- Stay audit-ready, year-round
Before You Rent Out Your Home, Talk to a Real Estate Tax Expert
Don’t list that property until you’ve had a conversation with someone who knows how to turn it into a financial asset, not a tax liability.
Book a consultation with Insogna CPA, your go-to tax professional near you for strategic real estate tax planning.
Let’s help you rent smarter, deduct deeper, and plan further.