Question on rental income for taxes

[jbooma]

I know the amount of rental income is the difference between income and expenses for our rental property.

You can deduct interest on the mortage for your rental property, however is the actual mortgage payment of that house considered part of rental expense or not?

[HOF44]

I know the amount of rental income is the difference between income and expenses for our rental property.

You can deduct interest on the mortage for your rental property, however is the actual mortgage payment of that house considered part of rental expense or not?

Nope I don't believe its deductible. Here is some good info on all things pertaining to rentals and taxes.

http://www.irs.gov/publications/p527/index.html

[chomerics]

I know the amount of rental income is the difference between income and expenses for our rental property.

You can deduct interest on the mortage for your rental property, however is the actual mortgage payment of that house considered part of rental expense or not?

I don't believe so. I think you can only write off intrest on a primary mortgage, but I'm not 100% positive.

[HOF44]

I don't believe so. I think you can only write off intrest on a primary mortgage, but I'm not 100% positive.

You can write off the interest on a rental property. I understood his question to be could you write off the total payment, which includes principal. I don't think you can deduct principal, only interest.

[chomerics]

You can write off the interest on a rental property. I understood his question to be could you write off the total payment, which includes principal. I don't think you can deduct principal, only interest.

Here is the time when it is not possible. . .

If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can't be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.

I may be mistaken, but I thought that was what Booma did a few months ago, I remember talking about it when he was looking. If that is not the situation, then yes you can, sorry about the confusion.

[HOF44]

Jbooma,

If you want you can post more details and see if anyone can help.

It might be worth it for you for one time to go to a tax specialist(not H&R Block) and see how they handle it for you. Then in the future you can use that info and do it yourself.

[GSF]

You can deduct the interest, but not the principal, which is why my rentals are on interest only loands. Rent collected is taxed as income.

[Phat Hog]

You can deduct the interest, but not the principal, which is why my rentals are on interest only loands. Rent collected is taxed as income.

You do streight interest only for your primary on investment/rental properties? Do tell me more....

[jbooma]

Here is the time when it is not possible. . .

I may be mistaken, but I thought that was what Booma did a few months ago, I remember talking about it when he was looking. If that is not the situation, then yes you can, sorry about the confusion.

We took a HELOC on the first home to buy the new one. Currently we are renting out our first home.

Interesting about the interest only loan on a rental property.

Thanks for all the info, at least with the expenses on the rental property (hoa, insurance, interest, warranty) that brings the income down a lot.

[jbooma]

You do streight interest only for your primary on investment/rental properties? Do tell me more....

Yes me to

We turned our first home into a rental but fixed the mortgage at the beginning of the year. The home is already valued a lot more then what we paid for it back in 2002

Phat how long have you been renting, we are wondering how long to keep the other home but are thinking of taking advantage of the 2 out of 5 year rules so we bypass capital gains.

[HOF44]

Intersting way to buy your current home. Its risky for the first home because of the HELOC, but leaves your home now free and clear in case of disaster. Did you ever consider taking out a fixed rate new mortgage on your first home? That would lock the low rates we are having now and keep you free of the possibilty of the HELOC rate jumping up high.

[HOF44]

Interest only is a great way to leverage your buying power, as long as the home value holds or goes up your golden. If it falls you screwed.

[DeanCollins]

jbooma,

you don know that you can depreciate the building that you are renting? It might help if you are selling under the 2/5 rule if you don't have to

"re-capture" the depreciation as a capital gain, ask your CPA.

depreciation - definition of depreciation - A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence.

[GSF]

Phat/Booma,

What I've done might not work in all areas, but it's worked nicely for me. For example, I bought a new construction 4/2 in a fast growing neighborhood in 2002 for about 148,000. I put 10% down, and got a 3 year fixed interest only. I don't remember the exact rate, but my payment was about $850 including the escrow for taxes and insurance. I put a for rent sign up while the house was being finished, and rented the house quickly for $1000, so I made about $150 a month positive income. The house was new, so there was very little maintenance involved, but whenever there was, I just kept the receipts and wrote off the expense. I also wrote off the interest off my income tax. At the end of the first year lease, I informed the tenant that I would sell the house at the end of the second year lease, for capital gains tax reasons. I wound up selling the house to the tenant for $170,000 3/4 of the way through the second year. I probably could have gotten more for the house, but I liked the tenant, and didn't want to be greedy. I made about 20g off the house, not counting the write off and positive income I made. I don't know why anyone would pay principle on an investment property, unless they are just afraid it won't go up much in value.

It's a little tougher to swing this kind of deal now since the rates have gone up. It helps if you have enough cash to make down payment of %20 or larger. I don't make much positive income on the rental I have now, but hopefully I'll do well when I sell it next year. I wish I had bought more property when the rates were so low, but I didn't have enough cash.

[HOF44]

Phat/Booma,

What I've done might not work in all areas, but it's worked nicely for me. For example, I bought a new construction 4/2 in a fast growing neighborhood in 2002 for about 148,000. I put 10% down, and got a 3 year fixed interest only. I don't remember the exact rate, but my payment was about $850 including the escrow for taxes and insurance.

I don't know why anyone would pay principle on an investment property, unless they are just afraid it won't go up much in value.

Thats exactly why you would pay principle. If the value went down or was stagnant when the balloon on the no interest loan came due and the appraised value of the house was less the than no interest mortgage you would not be able to pay the balloon. Unless of course you have enough reserves to put down the difference as a cash down payment.

I realize in the market we are in now this may not be likely. Just don't discount the risk.

I think alot of people are going to be hung out to dry because of no interest loans if the housing market ever cools.

[jbooma]

Phat/Booma,

What I've done might not work in all areas, but it's worked nicely for me. For example, I bought a new construction 4/2 in a fast growing neighborhood in 2002 for about 148,000. I put 10% down, and got a 3 year fixed interest only. I don't remember the exact rate, but my payment was about $850 including the escrow for taxes and insurance. I put a for rent sign up while the house was being finished, and rented the house quickly for $1000, so I made about $150 a month positive income. The house was new, so there was very little maintenance involved, but whenever there was, I just kept the receipts and wrote off the expense. I also wrote off the interest off my income tax. At the end of the first year lease, I informed the tenant that I would sell the house at the end of the second year lease, for capital gains tax reasons. I wound up selling the house to the tenant for $170,000 3/4 of the way through the second year. I probably could have gotten more for the house, but I liked the tenant, and didn't want to be greedy. I made about 20g off the house, not counting the write off and positive income I made. I don't know why anyone would pay principle on an investment property, unless they are just afraid it won't go up much in value.

It's a little tougher to swing this kind of deal now since the rates have gone up. It helps if you have enough cash to make down payment of %20 or larger. I don't make much positive income on the rental I have now, but hopefully I'll do well when I sell it next year. I wish I had bought more property when the rates were so low, but I didn't have enough cash.

So you flipped the house then. If you sold it before the second year don't you then pay a large tax?

That would work if you tend on only keeping the property for a couple of years, not if you plan to keep it long term. The home we are renting was our first and we went ahead and refinanced earlier this year, not knowing we were buying a new home just 3 months later

My question about the depreciation, if you claim that an according to turbo tax you have to do, then does that impact the money you make off it when you sell, how does that work?