From: Mesa, AZ
Dear TaxMama,
In March of this year (2004), I bought a house for $249,900.
The mortgage payment on the house was about $2350.
But I only make about $2270 a month from my job, gross.
So, I moved into the house in March with a friend of mine.
I paid a total of $750/month toward the mortgage and
he paid the rest of it (approx $1600/month) directly to
me,not to the lender.
I know that I can write off the interest on the
mortgage. However, because of the amount of the mortgage payment ($2352)
and the payment arrangement with my
roommate, I am not sure what to do.
Clearly, with my income, I do not pay anywhere near
that amount in taxes, so I would end up writing off
much more than I would owe.
I do want to take advantage of the tax benefits of home
ownership, but I don't want to get in trouble with the
IRS.
Should I write off the interest (or any portion of it)?
Thank you for any and all advice.
David
Hey David,
You, my friend, have rental income.
With housing prices so high these days,
hardly anyone can afford a home in the city
without a second income. So, if there's no
spouse, there's usually a roommate.
And when a roommate pays part of the costs,
that usually ends up being rent.
You'll need to file a Schedule E to report the
rent that your roommate pays you.
You'll need to find the appraisal of the property
to get the value of the land and building.
You will be depreciating the building using the
residential depreciation tables. I explain how to
use them - and how to report rentals in the
book.
When you fill out the form, split the property taxes
and interest in half. Put half on your Schedule A,
where you itemize your deductions. Put the other
half on Schedule E.
That should solve your problem about not having
enough income to account for the high interest
you're paying.
But, there's more!
In addition to deducting the property tax and interest
on Schedule E, you'll also be able to deduct half the
cost of utilities, insurance, gardener, cleaning and
any other kind of maintenance or repairs. And if you
did any major improvements or remodeling, you'll
be able to depreciate half the cost of that, too.
This will probably end up wiping out the income from
the rents...without really reducing your personal income
level so low as to attract attention.
Clearly, I can't cover it all for you. You'll want to
get a tax professional to prepare your tax return this
year - at least the first year that you
start doing this.
Enjoy your new home.
Best wishes,
Eva Rosenberg, MBA, EA
