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Law

What is a Residential Rental Property?

By Alexis W.
Updated May 17, 2024
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A residential rental property refers to the rental of a home. It is distinct from a commercial rental property, which is usually used to refer to a property used for commercial purposes, such as an office building or to a multi-unit rental building such as an apartment house.

For many real estate investors, buying a residential rental property is the best way to get started in the field of real estate investing. It is possible, for example, to buy a second home or a vacation home and use that as a residential rental property. The second home becomes a rental property as soon as it is rented out for income.

In a residential rental property, the home may be rented or leased for all of the year or only for part of the year. Renting the property for money for even one day can make the property into a rental property, although for tax purposes the property may be considered only a partial rental and a partial residence unless the home is rented for a set minimum period of time.

A residential property is used by some investors as a method of earning passive income. Passive income is money earned without having to work for it. Rents from residential properties count as passive income because the owner of the property simply collects on those rents as a result of permitting the renter to use the space; he doesn't actually have to do any work to get the income.

Income from a residential rental property is taxed within the United States and within many other countries. In the United States, rental income from residential real estate is listed on a 1099 rental income form. Taxes — including Medicaid and Social Security — must be paid on the rents.

Expenses can generally be deducted from a residential rental property as well. For example, mortgage interest may be deducted from taxes, but only for two rental properties. If an individual owns three or more homes, he may not deduct the mortgage interest from the third home on his personal tax return.

Repairs to the residential rental property can also be deducted from rental income earned. Improvements, however, are not deductible. In addition, if the owner lives in the home for some portion of the time and rents for some portion of the time, the owner must calculate what percentage of the time the home is used as a rental and can deduct only that percentage in repairs from his taxes.

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