First-Time Landlord Playbook

Step 1: Check you are ready

Before you list the property, answer these honestly:

• Does the rent cover the costs? Add mortgage, tax, insurance, HOA dues, a repair budget, a vacancy allowance and a capital reserve for roofs and appliances. Use the break-even calculator.
• Do you have a cash cushion? A water heater, a vacancy and a legal notice can land in the same month. Keep reserves you will not touch for personal spending.
• Are you allowed to rent it? Read your mortgage occupancy clause, HOA rules and any local rental registration or licensing requirement.
• Who handles 2 a.m. calls? If not you, price in a property manager now.

The accidental-landlord path: renting out your former home

Many first-time landlords never planned to be one: they moved for work, married, or could not sell at the price they wanted. Converting a home to a rental changes your taxes and insurance on the day it becomes available for rent.

The section 121 three-year window

Under IRC § 121, you can exclude up to $250,000 of gain ($500,000 for most married couples filing jointly) when you sell a home you owned and lived in for at least two of the five years before the sale (see IRS Publication 523). If you lived there two years or more and then rent it out, you generally have about three years from move-out to sell and still qualify. Two points people miss:

• Rental time after you move out, within that five-year window, is not “nonqualified use” (§ 121(b)(5)(C)(ii)(I)), so it does not shrink the exclusion.
• Gain equal to the depreciation taken after May 6, 1997 cannot be excluded (§ 121(d)(6)). It is taxed as unrecaptured section 1250 gain at a federal rate of up to 25%.

The keep-or-sell rental property calculator has a “This was my home” mode: enter the years you lived there and it shows when your window closes and what keeping it past that date would cost in tax.

Depreciation starts when it is available for rent

Per IRS Publication 527, depreciation begins when the property is placed in service, meaning ready and available for rent, even before a tenant moves in. For a converted home the basis is the lesser of your adjusted basis or fair market value at conversion, building only (land is never depreciable), recovered straight-line over 27.5 years with a mid-month convention.

Insurance changes to a landlord policy

Call your insurer before the lease starts. You need a landlord (dwelling) policy with liability coverage and, ideally, loss-of-rents coverage. Your personal belongings and liability as a tenant elsewhere go on a separate renters or homeowner policy.

Step 2: Set the rent

Price from comparable rentals, not from your mortgage payment. Find three to five similar listings nearby (same bedroom count, similar condition and parking) and note how long they sat. Adjust for differences such as in-unit laundry or a yard. The rent estimator and this rent-pricing guide walk through the method.

A price slightly under market usually beats a high price that sits: one empty month costs about 8% of a year’s rent. If no qualified applicant appears within two weeks of good marketing, the price or the photos are the problem. Check whether your city or state limits rent increases before you set the starting rent, because some caps measure later increases from it.

Step 3: Legal setup

• Local registration: some cities require a rental license, registration or inspection before you rent. Check your city and county websites.
• Security deposits: limits, where you must hold the money and return deadlines are set by state law. See the state legal guides and the security deposit calculator.
• Lead paint (homes built before 1978): federal law requires you to give tenants the EPA pamphlet Protect Your Family From Lead in Your Home, disclose any known lead-based paint or hazards, share any records, and include a Lead Warning Statement in the lease (see the EPA disclosure rule).
• Safety basics: working smoke and carbon monoxide alarms, secure locks, and any state-required disclosures.
• Separate money: a dedicated bank account for rent and expenses makes taxes and deposit accounting far easier. An LLC is optional for one property; discuss it with an attorney and your lender first.

Step 4: Screen applicants fairly

The Fair Housing Act (42 U.S.C. § 3604) bars discrimination based on race, color, religion, sex, national origin, familial status and disability. Some small owner-occupied buildings are exempt from parts of the Act (§ 3603(b)), but the advertising ban in § 3604(c) applies to everyone, and many states and cities add protected classes such as source of income. Practical rules:

• Write your criteria down before you advertise and apply them in the same order to every applicant.
• Use criteria that predict paying rent and caring for the home: verified income at a ratio you choose (check whether local law limits income tests for voucher holders), rental history and credit.
• Never ask about children, age, pregnancy, religion or national origin, and describe the property, not the ideal tenant, in ads.
• Criminal history: check state and local law first. Blanket bans remain risky under the Fair Housing Act even though HUD withdrew its 2016 guidance; if you consider records at all, use convictions only and assess them individually.
• Respond to disability-related requests for reasonable accommodation, such as an assistance animal under a no-pets policy.
• Keep notes on every application and the reason for each decision.

Use the tenant screening checklist and the fair housing cheat sheet.

Step 5: Lease and move-in

• Use a lease written for your state; a generic form may contain clauses your state will not enforce. Start from the lease agreement template.
• Spell out rent, due date, late fees (within state limits), who pays which utilities, repair requests and entry notice.
• Collect the deposit and first month’s rent in certified funds or electronically before handing over keys.
• Walk through with the tenant and complete a dated move-in inspection with photos. This is your evidence at move-out.
• Give emergency contacts and explain how to submit repair requests.

Running the first lease year

Once the tenant is in, the job becomes routine. A simple calendar keeps it that way:

• Every month: confirm rent arrived, record income and expenses, and file receipts by property. If rent is late, follow your lease and state notice rules exactly; do not improvise.
• Repairs: treat no heat, no water, gas leaks, sewage backups and security problems as emergencies. Answer routine requests within a day or two and give proper written notice before entering (your state sets the minimum).
• Seasonally: service the HVAC, clean gutters and test alarms using the maintenance checklist.
• Around month nine: decide whether to offer a renewal and at what rent. Check local notice periods and any rent-increase limits, then use the rent increase templates. Keeping a good tenant at a modest increase usually beats a turnover.
• At year end: total income and expenses per property, gather Form 1098 and property tax bills, and decide with your CPA whether the property is earning enough to keep. Accidental landlords should note the date their § 121 window closes.

Step 6: Your first year’s money and taxes

Rental income and expenses go on Schedule E of Form 1040, with depreciation on Form 4562 in the first year. Deductible costs include mortgage interest, property tax, insurance, repairs, management fees and travel to the property. See the tax deduction checklist.

Rental losses are passive, but under IRS Publication 925 an owner who actively participates can deduct up to $25,000 of rental loss against other income. The allowance shrinks by 50% of modified AGI above $100,000 and disappears at $150,000. Disallowed losses carry forward.

Worked example: an accidental landlord’s first full year

Hypothetical example. A single filer bought a home for $300,000 and added $20,000 of improvements, so the adjusted basis is $320,000. It is worth $400,000 when converted to a rental, so the lower figure, $320,000, is used. An assessor’s ratio puts 20% in land, leaving a $256,000 building basis.

• Annual depreciation: $256,000 ÷ 27.5 = $9,309
• Rent: $2,400 × 11 months (one month vacant) = $26,400
• Mortgage interest $9,600, property tax $4,800, landlord insurance $1,600, repairs $1,500
• Taxable result: $26,400 − $17,500 − $9,309 = −$409 loss

With modified AGI under $100,000 and active participation, the $409 loss offsets other income. Cash flow is a different story: if the monthly principal and interest payment is $1,700 ($20,400 a year), cash after all bills is $26,400 − $20,400 − $4,800 − $1,600 − $1,500 = −$1,900. A tax loss and a cash loss are not the same thing; know both.

Selling inside the window: suppose the owner sells three years after moving out for $430,000, with $25,000 of selling costs, after taking about $27,000 of depreciation. Adjusted basis is $320,000 − $27,000 = $293,000, so the gain is $405,000 − $293,000 = $112,000. The $27,000 tied to depreciation is taxable (up to 25%); the remaining $85,000 is excluded under § 121. Wait until year four and, without another two years of living there, the full $112,000 becomes taxable.

Common first-year mistakes

90-day action plan

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