Converting to a Rental Property
Keeping inherited property as a rental generates ongoing income while preserving the asset for future appreciation. This path requires heirs to take on landlord responsibilities or hire professional management. Converting to rental works best when the property is in a strong rental market, the numbers support positive cash flow, and heirs are prepared for the ongoing commitment of property ownership.Financial Analysis
Before deciding to rent, calculate whether the property will generate positive cash flow or cost money each month. Monthly income:- Market rent for the property (research comparable rentals in the area)
- Mortgage payment (if applicable)
- Property taxes (divided by 12)
- Insurance (landlord policy, divided by 12)
- Property management (typically 8-12% of rent)
- Maintenance reserve (typically 5-10% of rent)
- Vacancy allowance (typically 5-8% of rent)
- HOA fees (if applicable)
- Utilities (if owner-paid)
| Item | Example |
|---|---|
| Monthly rent | $2,000 |
| Mortgage | -$800 |
| Property taxes | -$300 |
| Insurance | -$150 |
| Property management (10%) | -$200 |
| Maintenance reserve (5%) | -$100 |
| Vacancy allowance (5%) | -$100 |
| Net cash flow | $350 |
Inherited properties without a mortgage have a significant advantage. No mortgage payment often means strong positive cash flow even after all other expenses.
Property Preparation
Rental properties have different preparation requirements than owner-occupied homes.Safety and habitability
Safety and habitability
Landlords must provide habitable housing. Address safety issues, functioning systems (HVAC, plumbing, electrical), and any code violations before renting. Many jurisdictions require rental inspections or licenses.
Durable finishes
Durable finishes
Choose materials that withstand tenant turnover. Hard flooring outlasts carpet. Semi-gloss paint cleans easier than flat. Quality fixtures reduce maintenance calls.
Appliance decisions
Appliance decisions
Decide which appliances to include. Stove and refrigerator are typically expected. Washer, dryer, and dishwasher vary by market. More appliances mean more maintenance responsibility.
Personal property removal
Personal property removal
Remove all personal belongings. Furnished rentals exist but are less common and require different lease terms and insurance coverage.
Documentation
Documentation
Photograph the property thoroughly before the first tenant. Document the condition of walls, floors, fixtures, and appliances. This protects against security deposit disputes.
Management Options
Heirs must decide whether to manage the property themselves or hire a property manager.Self-management
Self-management
Handling landlord duties directly saves management fees but requires time, availability, and knowledge.Responsibilities include:
- Marketing and showing the property
- Screening tenant applications
- Executing leases and collecting deposits
- Collecting rent and enforcing lease terms
- Responding to maintenance requests
- Coordinating repairs with contractors
- Handling tenant issues and complaints
- Managing turnover and re-leasing
- Complying with landlord-tenant laws
- Heirs who live near the property
- Those with time and interest in hands-on management
- Single properties with reliable tenants
Professional property management
Professional property management
Property managers handle day-to-day operations for a fee, typically 8-12% of monthly rent plus leasing fees for new tenants.Services typically include:
- Tenant placement and screening
- Rent collection and accounting
- Maintenance coordination
- Regular property inspections
- Lease enforcement
- Eviction processing if needed
- Financial reporting to owners
- Heirs who live far from the property
- Those without time or interest in management tasks
- Multiple heirs who want professional oversight
- Properties requiring frequent attention
Legal Requirements
Landlords must comply with federal, state, and local laws governing rental property.Fair housing
Fair housing
Federal Fair Housing Act prohibits discrimination based on race, color, religion, national origin, sex, familial status, or disability. State and local laws may add protected classes. Fair housing applies to advertising, tenant selection, lease terms, and all landlord-tenant interactions.
Landlord-tenant laws
Landlord-tenant laws
State laws govern lease requirements, security deposits, notice periods, entry rights, habitability standards, and eviction procedures. Requirements vary significantly by state.
Local regulations
Local regulations
Many jurisdictions require rental licenses, inspections, or registrations. Some have rent control or additional tenant protections. Check city and county requirements.
Lead paint disclosure
Lead paint disclosure
Properties built before 1978 require lead paint disclosure to tenants. Landlords must provide an EPA-approved pamphlet and disclose known lead paint hazards.
Insurance Requirements
Standard homeowners insurance does not cover rental properties. Landlords need different coverage.| Coverage Type | What It Covers |
|---|---|
| Landlord policy (DP-3) | Property damage, liability, loss of rental income |
| Liability coverage | Injuries to tenants or visitors on the property |
| Loss of rent coverage | Income lost if property is uninhabitable due to covered damage |
| Umbrella policy | Additional liability protection beyond base policy limits |
Tax Implications
Rental income is taxable, but landlords can deduct expenses and depreciation to reduce tax liability.Rental income reporting
Rental income reporting
Report all rental income on Schedule E of your tax return. Income includes rent, late fees, and any other payments from tenants.
Deductible expenses
Deductible expenses
Deduct ordinary and necessary expenses for managing and maintaining the rental:
- Mortgage interest
- Property taxes
- Insurance premiums
- Property management fees
- Repairs and maintenance
- Utilities (if owner-paid)
- Advertising
- Legal and professional fees
- Travel to the property for rental activities
Depreciation
Depreciation
Deduct a portion of the property’s value each year as depreciation. Residential rentals depreciate over 27.5 years. Only the building value depreciates, not land. For inherited property, depreciation is calculated from the stepped-up basis.
Depreciation recapture
Depreciation recapture
When you eventually sell, depreciation claimed over the years is “recaptured” and taxed at up to 25%. This applies regardless of how long you held the property.
1031 exchange option
1031 exchange option
Selling a rental property triggers capital gains tax. A 1031 exchange allows deferring that tax by reinvesting proceeds into another investment property within specific timeframes and rules.
When Multiple Heirs Own the Rental
Joint ownership of rental property requires ongoing coordination. Decisions requiring agreement:- Rent amount and lease terms
- Tenant selection
- Major repairs and improvements
- Whether to hire or change property managers
- How to handle operating shortfalls
- When and whether to sell
- Written agreement outlining decision-making, expense sharing, and buyout terms
- Consider forming an LLC for liability protection and clearer management structure
- Establish a joint account for rental income and expenses
- Define what happens if one heir wants to exit
Disagreements among co-owners are easier to resolve with a written operating agreement established upfront.
Exit Strategy
Consider how and when the property might eventually be sold. Common exit triggers:- Significant repair needs that exceed investment appetite
- Market appreciation reaches target value
- Change in heirs’ circumstances or goals
- Tenant or management problems
- Better investment opportunities elsewhere
- Traditional sale (capital gains tax applies)
- 1031 exchange into another investment property (defers taxes)
- Sell to a co-heir (buyout)
- Gift or bequest to next generation (estate planning considerations)
Learn More
Property Management Overview
Understanding property management services
Comparing Property Managers
How to evaluate and select a property manager
Rental Property Taxes
Detailed guide to rental income and deductions
1031 Exchanges
Tax-deferred exchange strategies
Landlord-Tenant Overview
Legal guide for rental property owners
Lease Agreements
Essential lease terms and requirements
Landlord Rights
Understanding your rights as a property owner
Security Deposits
Rules for collecting and returning deposits
Specialty Insurance Coverage
Landlord policies and liability protection
Comparing Insurance
Finding the right landlord coverage
LLCs and Business Structures
Entity options for rental property ownership
Fair Housing
Anti-discrimination requirements for landlords
You’ve Completed the Inherited Property Path
You now understand:- When probate is required and how the process works
- How stepped-up basis affects your tax liability
- A framework for deciding whether to sell, keep, or rent
- How to transfer title to establish ownership
- Special considerations when selling inherited property
- What it takes to convert inherited property to a rental
Search the Directory
Find and compare local professionals with verified reviews
Back to Overview
Review the complete inherited property journey