To set up a rental property the right way, you form a business entity, get an EIN from the IRS, bring the unit up to habitability and safety codes, obtain a local rental license, write a lease and screening policy that complies with fair housing law, buy a landlord insurance policy, and prepare to report rental income on your federal return. Each step has its own legal requirements, and skipping any of them can expose you to fines, lawsuits, or the loss of your ability to evict a nonpaying tenant.
Form an LLC and Get an EIN
Start by separating the rental from your personal finances. Most landlords form a Limited Liability Company because it shields personal assets from the property’s debts and legal exposure without the formality of a corporation. You create one by filing Articles of Organization with your state’s filing office, usually the Secretary of State. The filing lists the company name, registered agent, and management structure. Fees generally run from $50 to $500 depending on the state.
Once the LLC exists, apply for an Employer Identification Number from the IRS. The EIN is a nine-digit number that functions like a Social Security number for the business, and you need it to file tax returns and open a business bank account. The online application issues the number immediately at no cost, and Form SS-4 is available if you prefer phone, fax, or mail. You will need the legal name of the entity and the Social Security number of the responsible party to complete it.1Internal Revenue Service. Get an Employer Identification Number
One housekeeping note on federal reporting: as of March 2025, entities formed in the United States are exempt from the Beneficial Ownership Information report that FinCEN previously required. Only foreign entities registered to do business in a U.S. state have to file.2FinCEN.gov. Frequently Asked Questions
Get the Property Up to Code
Every rental has to meet a baseline of habitability before anyone can legally live in it. State and local law set the specifics, but almost all jurisdictions require functioning plumbing with hot and cold running water, heating that keeps the unit at a safe temperature in cold months, and electrical wiring that is up to code and free of fire hazards. Letting these slip can trigger daily fines or an order declaring the unit unfit for occupancy.
Install smoke detectors on every level and inside each sleeping area. Carbon monoxide alarms are widely required where there are fuel-burning appliances or an attached garage. Placement rules and the required alarm type vary by local fire code, so check yours before the first move-in.
If the building went up before 1978, federal law adds a disclosure step. Before the tenant signs the lease, you have to give them the EPA pamphlet “Protect Your Family From Lead in Your Home,” disclose any known lead-based paint or hazards, share any inspection reports you have, and include a lead warning statement in or attached to the lease.3Office of the Law Revision Counsel. 42 USC 4852d – Disclosure of Information Concerning Lead Upon Transfer of Residential Property The EPA requires sellers, landlords, and property managers to complete these steps for all pre-1978 housing.4Environmental Protection Agency. Lead-Based Paint Disclosure Rule Section 1018 of Title X
Get Your Local Rental License
Most cities and counties require a rental license, a Certificate of Occupancy, or both before you can lease a property. You apply through the local housing or building department, and the application usually triggers a mandatory inspection. Inspectors check for adequate bedroom egress windows, working bathroom ventilation, functional smoke and carbon monoxide alarms, and the absence of structural defects. If the property fails, you get a list of violations and a deadline to fix them before re-inspection.
Fees and renewal schedules vary. Some jurisdictions charge a one-time fee; others require annual or biennial renewal. Operating without a valid rental permit can lead to fines, and in some places an unlicensed landlord cannot file an eviction, which means no legal remedy if a tenant stops paying.
Zoning matters too, especially if you plan to run the property as a short-term rental through Airbnb or VRBO. Many municipalities draw a line between long-term leases of 30 days or more and short-term stays, and some ban short-term rentals in residential zones entirely. Confirm your intended use is allowed before you commit to a rental strategy.
Know the Fair Housing Rules Before You Advertise
The federal Fair Housing Act prohibits refusing to rent, setting different terms, or otherwise making housing unavailable because of race, color, religion, sex, familial status, national origin, or disability.5Office of the Law Revision Counsel. 42 USC 3604 – Discrimination in the Sale or Rental of Housing It covers advertising, screening, lease terms, and property access. You cannot publish a listing that expresses a preference or limitation based on any of those characteristics. Many states and cities add protected classes of their own, so check local rules before you write screening criteria or ad copy.
You also have to provide reasonable accommodations to tenants with disabilities. Assistance animals, including emotional support animals, are the most common request. You cannot charge a pet fee or deposit for one, and you have to make an exception to any no-pet policy when the tenant provides documentation of a disability-related need. Online registry certificates are not reliable documentation; a note from the tenant’s healthcare provider who has personal knowledge of their condition is.6U.S. Department of Housing and Urban Development (HUD). Fact Sheet on HUDs Assistance Animals Notice
Penalties are steep. In a HUD administrative action, fines reach $26,262 for a first violation, $65,653 for a second within five years, and $131,308 for two or more within seven years.7eCFR. 24 CFR 180.671 – Assessing Civil Penalties for Fair Housing Act Cases A tenant who sues privately can recover actual damages, punitive damages, and attorney’s fees.8Office of the Law Revision Counsel. 42 USC 3613 – Enforcement by Private Persons
Write the Lease and Screening Policy
The lease is the legal spine of the tenancy. At a minimum, it should state the monthly rent, the due date, the late payment penalty, the term (fixed or month-to-month), and the conditions under which either side can end the agreement. Spell out who pays which utilities, set the rules on guests and property modifications, and attach any required disclosures such as the lead paint notice.
Write a screening policy and apply it the same way to every applicant. Inconsistent standards are what fair housing complaints are built on. A common income benchmark is gross monthly income of at least three times the rent. Many landlords set a credit score threshold, though a range reads as more flexible than a hard cutoff. State clearly how criminal history and prior evictions factor in, and remember that blanket bans on criminal records may violate fair housing rules in some jurisdictions.
Build the entry rules into the lease too. Most states require at least 24 hours’ written notice before you enter an occupied unit for non-emergency reasons like repairs or inspections, with notice periods ranging from 12 to 48 hours. Emergencies such as a burst pipe, gas leak, or fire allow immediate entry.
Security Deposit and Landlord Insurance
A security deposit cushions you against unpaid rent and property damage. Most states cap it at one to two months’ rent, and many require you to hold the money in a separate account rather than mix it with operating funds. Some states require you to pay interest on the deposit, particularly for longer tenancies or larger buildings.
When the tenant moves out, you have to return the deposit, minus documented deductions for damage beyond normal wear, within the deadline your state sets. Return windows run from 10 to 60 days, with 30 days the most common. Miss the deadline or fail to provide an itemized deduction list and you can face penalties; in some states you forfeit the right to withhold any portion of the deposit. Dated photographs and a written inventory at move-in and move-out are what back up any deductions you later claim.
Your homeowner’s policy will not cover a property you rent to someone else. You need a dwelling fire policy written for rental use. The broadest option is the DP-3 (special form), an open-perils policy covering the structure and other on-site structures against all damage except specifically excluded events, and DP-3 policies typically also cover lost rental income if the property becomes uninhabitable. DP-1 (basic) and DP-2 (broad) cover fewer perils and cost less. On top of the dwelling policy, a separate umbrella or landlord liability policy covers injuries on the property.
Signing Day
Once the unit is ready, licensed, and insured, you can take applications. Collect a complete application from every adult who will live there and run credit and background checks through a screening service. Reports usually cost between $30 and $75, and in most states you can pass the fee to the applicant as a non-refundable application charge.
After you verify income, references, and background, move to signing. Give the tenant every required disclosure before or at signing: lead paint, bed bug history, mold, and anything else your jurisdiction mandates. Walk through the unit together and note every scuff, stain, and scratch on a written checklist both of you sign. The checklist, together with photographs, is your baseline for damage at move-out.
Collect the first month’s rent and the full security deposit in guaranteed funds such as a cashier’s check or certified funds. Once the money clears and the documents are signed, hand over the keys with your emergency contact information and instructions for submitting maintenance requests. That exchange is when the landlord-tenant relationship officially begins.
Taxes Start With the First Rent Check
All rental income, including rent payments, advance rent in any form, and any portion of a security deposit you keep, has to be reported to the IRS on Schedule E (Form 1040).9Internal Revenue Service. About Schedule E (Form 1040) Supplemental Income and Loss If you use the cash method, which most individual landlords do, you report income in the year you receive it.
You can deduct ordinary and necessary operating expenses from rental income, which lowers the amount you owe tax on. Common deductions include mortgage interest, insurance premiums for the year the coverage applies to, repairs and maintenance such as fixing a leaky faucet or repainting a unit, property taxes, advertising costs, professional fees paid to a property manager, accountant, or attorney, and any utilities you pay on the tenant’s behalf. Improvements that add value, like a kitchen remodel, cannot be expensed in the year you pay for them; they have to be capitalized and depreciated. The distinction between a deductible repair and a capitalizable improvement trips up a lot of new landlords, and IRS Publication 527 lays it out.10Internal Revenue Service. Publication 527 Residential Rental Property
On top of operating expenses, you depreciate the building itself (not the land) over 27.5 years under the Modified Accelerated Cost Recovery System.11Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Depreciation is a paper deduction: it reduces taxable income without costing you additional cash that year. A building with a $275,000 basis excluding land generates a $10,000 annual depreciation deduction. Later improvements follow the same 27.5-year schedule.10Internal Revenue Service. Publication 527 Residential Rental Property
One thing to know going in: rental real estate is generally a passive activity for tax purposes, so losses from the property normally cannot offset your wages or other non-rental income. If you actively participate in managing the rental — approving tenants, setting rent, authorizing repairs — you can deduct up to $25,000 in rental losses against other income each year.12Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited That allowance phases out between $100,000 and $150,000 of modified adjusted gross income, and it is unavailable if you file married-filing-separately and lived with your spouse at any time during the year. Unused losses carry forward.13Internal Revenue Service. Publication 925 Passive Activity and At-Risk Rules
Keep your records from day one. The IRS requires you to hold on to rental records until the statute of limitations expires for the year you sell the property, which generally means at least three years after the return for the year of sale, longer if you underreport income by more than 25 percent or never file.14Internal Revenue Service. How Long Should I Keep Records Purchase documents, improvement receipts, depreciation schedules, and annual returns all stay in the file.