Rental Under Water


Today TaxMama® hears from Chris in the TaxQuips Forum with a good question. “In the near future I plan to purchase a 2nd home in a different city, and move my primary residence to that property. I will rent my current home. The mortgage for my current property is underwater. The rent I can charge will not cover the mortgage payment. I was wondering if I can claim, as a deduction, the difference between what I am able to charge in rent and the mortgage payment?

Example:

Monthly mortgage – tax/insurance = $1,750.00
Monthly Rental Fee = $1,000.00
for a difference of $750.00 x 12 = $9,000.00

Can I claim that $9,000.00 as a deductible loss?” 

Ask TaxMama 

 Hi Chris,

While you are still living in your home, consider getting a mortgage modification, if you can qualify for one. While you may not be able to reduce the loan balance, you might be able to drastically reduce the interest rate. That will make the house more affordable.

When you rent out the property, assuming you rent it out at fair market rents in the area, your loss will be even higher than you predict. You will deduct the insurance, property taxes (already in the loan payment) and depreciation, plus whatever costs of maintenance and repair you incur. You will not deduct the principal payments included in the loan. By the time you get done, your loss will be apt to exceed $10,000.
Read IRS Publication 527 for more details about rental properties.

Can you deduct it each year? I don’t know. It depends on all your other income – and your filing status – and if you are the one managing the property, or you farm it out to a management company. As long as you are not married filing separately, and you are the only property manager, you may deduct up to $25,000 per year of rental losses IF your adjusted gross income is low enough not to be affected by the phaseout rule:

Phaseout rule. The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. 

Read IRS Publication 925 for more information about Passive Activity and At-Risk Rules

It really does help to get informed before you do this.

And remember, you can find answers to all kinds of questions about rental losses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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