The Basics on How to Become a Landlord
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Becoming a landlord can be a great way to generate additional income, but it requires more than sitting back and cashing rent checks. Here are some key responsibilities that come with renting property.


Legal Obligations for Renting to Tenants

As a landlord, your central duty is to keep the premises safe and suitable for living. Conditions don’t need to be immaculate or elegant, but the property must comply with basic standards for heating, plumbing, gas, clean water and electricity, as well as a secure roof. Unless otherwise agreed, it’s often the landlord’s responsibility to ensure tenant safety by providing adequate exterior lighting and secure access, such as deadbolt locks on all exterior doors, responding to security requests, and reporting suspicious activity to authorities.

On top of state laws, you need to adhere to local ordinances and safety codes, such as requirements for smoke and carbon monoxide detectors, fire extinguishers, lead paint and mold removal, window guards, and stairwell banisters. Install smoke detectors and at least one fire extinguisher in each rental property.

You also may be obligated to take classes on being a landlord and perform frequent maintenance, such as sweeping common areas (like the sidewalk), clearing gutters, removing trash, recycling, and making repairs.

Although laws related to tenancy vary by city and state, some general principles regulate the relationship between landlord and tenant across the country. For instance, a residential lease is the basic agreement that gives the landlord the right to rent payments in return for the tenant’s use of the space. The rental term and amount, among other material terms, should be specified in the agreement.

Rental agreements should also address:

  • Number of occupants allowed
  • When and how much rent is due 
  • Penalty provisions for late payments, damage to property, and breaching the agreement
  • Types of pets allowed, if any
  • Guidelines for outdoor grills and outdoor play equipment

Because landlord insurance typically doesn’t protect the tenants’ property nor their liability, tenants may be encouraged or even required to get their own renter’s policy.

In addition to assuring that important rental terms are addressed in a written residential lease agreement, a legal advisor can help you identify the federal, state, and local laws that apply to your particular situation.

Appropriate Insurance for Landlords

There are three primary types of landlord insurance:

 

  • Personal liability coverage, which typically covers some of the expenses associated with personal injury and other lawsuits related to accidents on the rental premises
  • Dwelling coverage, which covers damage to the structure
  • Loss of Income coverage, which may help compensate for rent lost if the property becomes uninhabitable

Most homeowners insurance policies do not cover rental property. However, if you live in the same home as the tenants, you may be able to add an endorsement to your homeowners policy without obtaining separate coverage. 

To further protect yourself from liability, you might also consider a personal umbrella insurance policy. Particularly if you’re operating as a sole proprietorship, you may be open to unlimited liability, so the more protection the better. On the other hand, if you choose to incorporate your rental property, it might be necessary to buy a commercial package policy that insures dwelling property, rents, and liability. Keeping track of these main considerations can help ensure that the decision to become a landlord goes smoothly and successfully.

 

The Tax Impact of Being a Landlord

Becoming a landlord will change your tax filings. As a landlord, you’ll probably operate on a cash basis, meaning you’ll report your rental income as income when it’s actually or constructively received and deduct rental expenses when paid, using Form 1040, Schedule E. Security deposits are generally not taxable if they will be (and are) returned to the tenant at the end of the lease, but if you keep all or part of a security deposit, it is likely taxable income.

As a landlord, you may be able to deduct rental property expenses such as:

  • Advertising
  • Cleaning and maintenance
  • Insurance
  • Mortgage interest
  • Management and professional fees
  • Local property taxes
  • Repairs
  • Supplies

Be careful to distinguish between improvements, which should be capitalized and deducted over several years, and repair costs, which can be deducted in the year in which they were paid.

Your tax filings will depend on how you decide to structure your landlord business. Along with a sole proprietorship, you may consider incorporating, operating as an LLC, or as an S corporation. These three structures may provide more tax breaks.

A tax professional can help you identify specific tax implications created by your particular circumstances. Learn more about managing tax questions at the Regions Tax Center.

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