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We are not real estate investors. We are moving because of a job and will be forced to rent out our house (our first and only home). If I understand the tax laws correctly from researching online, it is my understanding that our tax deduction for interest mortgage will go away and we may be forced to claim our rental income as income on our tax return.
This does not seem fair because we are not renting it to make income or for investment purposes (in fact it will be a loss for us). Is there anyway to still get the interest tax deduction?
I know I should ask a tax professional but I am wondering if anyone here can comment.
fret not,,,, if you rent out the house the interest deduction is on schedule e now and not schedule A ,thats all,... It comes off the rental income and rental expenses form.
So I guess the real bummer is that I have to report rental income as "income". I can see how investors and speculators should be required to report it as income but for the average guy who is moving for a job and is forced to rent out his house why should this be considered taxable income? Maybe I misunderstand something?
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remember you are getting a dollar per dollar reduction on your rental income for expenses (taxes, interest, utilities, insurance, depreciation...) that is much better than getting a 'deduction' on your schedule A.
( Sched A deduction = % saved only equal to your marginal tax bracket... probably below 20% even if you are a HIGH wage earner ($5000 in deductions only equals $1000 reduction in tax obligation). As an expense on schedule E, it is $earned - $spent Thus $5000 spent on interest and taxes would reduce rental income by $5000)
Thus in many cases, there can be an advantage to renting properties, rather than owning a primary residence.
i.e. if I had $500,000 tied up in a primary house (and paid off). That asset is COSTING me taxes, and investment opportunity costs. If I had the same $500,000 invested in an income property (or investment) that was returning 12% NET income, I would be availed $5,000 / month to rent an equivalent joint. It is likely you could rent an equivalent joint for ~$1500 / month and have $3500 / month to party (or stay at the beach in a nice'er shack). If I was only getting 6% net on $500k investment, I would have to skimp by on only $2500 extra cash / month for primary housing requirements. Houses can be expensive to own...
i think you just may be confused as to what marginal tax rate means,,, its the highest tax rate your hit with on your next dollar of income.......
as an example if you earned 80,000 and 80,000 was the max at 25% then the next dollar and anything additional you earned would be at 28% tax if that was the next bracket .( im not using actual numbers),.. that is is your marginal rate
MARGINAL RATE IS ALWAYS YOUR HIGHEST BRACKET and what your next dollar earned would be at,or your deductions..... my regular rate this year was 28% , my marginal rate was 33%
all deductions and income from that point are figured at 33% for me as if i didnt get the deduction thats the rate on that money..
i think you maybe thinking of the rate when you just take total tax and divide by total income and its some number like 15% or so depending on your income. thats not marginal rate though thats called average tax rate ..
the deductions would be the same for mortgage interest and real estate taxes regardless as long as you met the standard deduction on schedule a ......
personal mortgage interest is subject to the standard deduction....
renter or homeowner both get the 10,000 in standard deduction regardless if the renter has 1,000 bucks in deductions and the homeowner has 10,000 in mortgage insterest and real estate taxes.... the homeowner dosnt really get anything extra back until after the standard deduction everyone gets....
schedule e is seperate from the standard deduction so you get both....but remember a deduction isnt a good thing... you really are spending 3 bucks from old piggy and getting back about 1 buck of the 3 spent...... yes it offsets the rent but its still money spent.
give me no deductions, no expenses and pure rental income any day..... ill gladely pay the tax
no matter which schedule the deductions are on they still work out to the same amount of tax not paid in either case... your example isnt correct.. your getting a deduction and a tax credit mixed up i think. all deductions off income yield the same results.....
Last edited by mathjak107; 06-08-2010 at 02:50 PM..
Everything you buy during the year (cleaning supplies,paint,nails,etc.) COULD be deducted,even if its for your own house,if you like to sail "close to the wind" with the IRS. Also,if you go back to visit that mother-in-law you love,part or all of the travel expenses could be deducted,with the rationalization that you were "managing your property".All taken into account,you need a thick skin to be a landlord in absentia,from personal experience it stinks.I would never do it again.No one will take care of your home the way you want them to,most will neglect and abuse it.That is why you will depreciate the property over time on your taxes. 1/27th per year of fair market value,if my fading memory serves me correctly.
I am putting my house up for rent soon. My mortgage is $1,920/month. I've been told "Don't make a profit" because of taxes. I don't know if I should rent for just enough to cover the mortgage, or if I should still try to rent it for as much as I can. I may pay taxes, but, I'd still pocket money too yes?
I am putting my house up for rent soon. My mortgage is $1,920/month. I've been told "Don't make a profit" because of taxes. I don't know if I should rent for just enough to cover the mortgage, or if I should still try to rent it for as much as I can. I may pay taxes, but, I'd still pocket money too yes?
You are mixing so many different things together.
If you are moving out of your primary home and decide to rent it out. You set the rent based on market value. Not what your mortgage payment is. That rent that you are getting may not be enough to cover your mortgage and expenses. This happened all the time. Not all homes are good for rent. This is where you have to decided whether to cut the lost now and sell or continue to hold on to the property. If rent is higher than your expense, that is considered income before deductions.
Just know that your house may be in great shape now but once it's rented out, you will need to put money in getting the place back in selling condition (if you decide to sell down the line). House have wear and tear and more so when you are dealing with tenants.
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