Renting Out Part of Your Home? Prepare for This Consequence

Owning a home can be an expensive prospect. You might struggle to keep up with your mortgage payments, property taxes, maintenance, and repairs. And even if your home is paid off, there are still a lot of expenses you'll have to cover. That's why if your home has a separate area that lends to privacy, like a finished basement or garage, you may want to consider renting it out.

Renting out a portion of your home will mean giving up some living space. It might also mean giving up a degree of privacy.

Plus, as a landlord, you'll have to address issues a tenant of yours brings up right away. If the bathroom in your basement stops working, you can't simply put off addressing it during a busy week if you have a tenant living down there (whereas if you weren't renting out that space and have other bathrooms in your home, it might be something you can wait to deal with).

But still, there's something to be said for being able to generate a steady stream of monthly income. If you're a newer homeowner, those rent payments might cover most or even all of your mortgage payments. And if you're a retiree who doesn't want to downsize, the rental income you collect could nicely supplement your retirement plan withdrawals and Social Security benefits.

But if you're going to rent out your home, you might have to brace for one large expense. And it's an unavoidable one at that.

Prepare to pay taxes on your rental income

The IRS is entitled to a piece of any income you get your hands on, whether it's a paycheck from work, a distribution from a traditional IRA or 401(k) plan, or interest in your savings account. Similarly, the IRS considers rental income taxable. You must report all of your rental income when you file your tax return and pay the IRS accordingly.

So, let's say you charge $1,200 a month in rent. You might think you're walking away with a cool $14,400 a year. But that profit may be much lower when you account for your associated tax bill.

Now that said, you are allowed to deduct expenses associated with renting out part of your home. For example, if you have to purchase supplies to repair your tenant's living quarters, you can deduct their cost on your taxes, and that deduction will offset the amount of tax you need to pay on your rental income.

Don't get thrown for a loop

Renting out part of your home may be a lucrative prospect for you. But don't forget to account for taxes as part of that deal.

Remember, when your tenant hands over a check for rent every month, the portion due to the IRS won't be deducted magically. So before you spend all of that money, you may want to set some aside so you're able to cover your associated tax bill in full. The last thing you want is a tax debt on your hands because you didn't reserve funds for the IRS.