Need explanation or IRS publication about tax consequences of renting out my paid off house while living in a rental?

So I've been living in my current house for about 5 years now, but honestly it's way too much space for just me. I'm thinking about renting it out since it's completely paid off (no mortgage), and then moving into a smaller rental apartment that would better fit my needs. I'm pretty confused about the tax implications though. Would I have to pay taxes on the rental income? Could I deduct the rent I'd be paying for my new place? Are there specific forms I need to fill out for the 2025 tax season if I make this switch? Would I lose any homeowner tax benefits? I tried looking through some IRS publications but got overwhelmed pretty quickly. If anyone could explain the basic tax issues I need to be aware of or point me to a specific IRS publication that covers this situation, I'd really appreciate it!

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18 comments

Freya Collins

•8M

The situation you're describing is actually pretty common! When you rent out your house, you'll report the rental income on Schedule E of your tax return. But the good news is you can deduct expenses related to the rental property including property taxes, insurance, maintenance costs, and even depreciation. Unfortunately, you can't deduct the rent you'll pay for your new apartment - that's considered a personal expense. You will lose the homeowner benefits like the mortgage interest deduction (though you mentioned your house is paid off) and the property tax deduction as a personal expense (though you'll still deduct them as rental expenses). IRS Publication 527 "Residential Rental Property" covers most of what you need to know. Also look at Publication 946 for info about depreciation. You'll want to keep detailed records of all rental income and expenses.

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Freya Collins

•8M

Yes, that's a good question about capital gains. You may still qualify for the Section 121 exclusion which allows you to exclude up to $250,000 of capital gains ($500,000 if married filing jointly) if you've owned and used the property as your main home for at least 2 out of the 5 years before the sale. The tricky part is that once you convert to a rental, the clock starts ticking. If you rent it out for more than 3 years, you might not meet the residency test. Also, be aware that you'll need to recapture depreciation when you sell, which is taxed at 25% regardless of your income bracket.

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Oscar O'Neil

•8M

I went through this exact situation last year and was super confused about all the tax stuff too. I found this AI tax assistant at https://taxr.ai that really helped me understand the rental property tax situation. You upload your documents and it explains everything in plain English. It helped me figure out how to properly set up my rental income tracking, what expenses I could deduct, and how to handle depreciation. The depreciation part was the most confusing for me but the tool broke it down step by step. I would have totally messed up my taxes without it!

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Oscar O'Neil

•8M

It absolutely works with rental properties - it helped me understand exactly how to set up my Schedule E and what documentation I needed to keep. It gets very specific based on your actual situation and documents. For expense tracking, yes, it gave me templates and guidelines for tracking everything throughout the year. It doesn't directly integrate with accounting software that I know of, but it gave me a really clear system to follow so I knew exactly what records to keep and how to categorize expenses properly for tax purposes.

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Charlee Coleman

•8M

Just wanted to follow up about taxr.ai - I decided to give it a try after asking about it here. It's been a game changer for my rental property questions! It analyzed my specific situation and gave me personalized advice about depreciation calculations and which expenses were deductible. The most helpful part was the guidance on how to handle repairs versus improvements (which have different tax treatments). I was classifying several things wrong before. It even created a customized expense tracking template for me. Definitely worth checking out if you're new to being a landlord!

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Liv Park

•8M

One thing nobody mentioned yet - if you're going to start managing a rental property, you'll probably need to deal with the IRS at some point to ask questions. I tried calling them for weeks about some rental tax questions and could never get through. I finally used this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes when I'd been trying for days on my own. You can see how it works in their demo video here: https://youtu.be/_kiP6q8DX5c Saved me so much frustration and I actually got answers to my specific rental income questions from a real IRS person. They were able to explain exactly how to handle the transition from primary residence to rental property.

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Liv Park

•8M

The service basically uses technology to navigate the IRS phone tree and hold in line for you. When they get a human, they call you and connect you directly to the agent. It's not magic - they're just handling the waiting part for you. They definitely can't guarantee how quickly you'll get through since that depends on IRS staffing that day, but in my experience it worked in about 15 minutes instead of endless redials. The video shows exactly how it works if you're curious - they're pretty transparent about the process.

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Ryder Greene

•8M

Wow, I need to apologize about my skeptical comment on Claimyr. I was super frustrated after wasting hours trying to talk to someone at the IRS about my rental property tax questions. After commenting here, I decided to try it anyway. It actually worked! Got connected to an IRS agent in about 22 minutes. The agent helped me understand exactly how to handle my specific situation with converting my primary residence to a rental. They explained the "placed in service" date and how that affects my depreciation schedule. Saved me from making a big mistake on my tax forms. Sometimes I hate being wrong but in this case I'm glad I was!

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Carmella Fromis

•8M

Don't forget another important consideration: state taxes! Depending on your state, the rental income might be taxed differently than your regular income. Some states have additional requirements for landlords too. Also, it might be worth looking into setting up an LLC for your rental property for liability protection. That can have different tax implications depending on how you file. I'd recommend talking to a CPA who specializes in real estate before you make the switch.

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Carmella Fromis

•8M

A single-member LLC is typically treated as a "disregarded entity" for tax purposes, so you'd still report everything on your personal return using Schedule E. The depreciation works the same way regardless of whether you have an LLC or not. You generally don't need to file a separate business return for a single-member LLC used for rental property. However, if you elect to have your LLC taxed as an S-corp (which some people do to potentially save on self-employment taxes), then you would file a separate return. But for most small landlords with one property, keeping it simple with a disregarded LLC is usually the way to go.

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