Renting Losses

Today TaxMama  hears from Alissa in the TaxQuips Forum. She wants to know, “The mortgage on my rental property is $1,500 (including tax, insurance, & a 2nd). But I only charge $1,200/month for rent because that is the going rate in the neighborhood. Do I still report the $1,200 as rental income even though it is not even enough to cover the monthly costs?  If so, is there a way to write-off the $300 monthly loss?”

Dear Alissa,

Rita Lewis, an enrolled agent in Connecticut replies.  If you are charging the true Fair Rental Value in your area and want to claim a for-profit rental, then go for it.  But, be sure to document the rents of similar properties and keep on file in case you are ever challenged by the IRS. 

Depending on your income, you may be eligible to take a loss of up to $25,000 against your other income.  If you do not qualify to take your full loss currently, it is not lost. The loss is suspended until the rental makes a profit or your income drops into the qualifying range, or you sell the rental property. 

Rentals frequently generate current losses due to depreciation – so make sure you compute the depreciation properly.  If your loss is due to operating costs, document it well and consider selling it to invest your money in a more profitable business.  Deductions against rental income include mortgage(s) interest, property tax, property insurance, repairs, etc. You don’t deduct the principal payments you make on the mortgage (when you received the loan proceeds to buy the property you didn’t declare the loan proceeds as income).

Now, if you’re not charging higher rent because you’re renting to a relative and giving them a break over what they would pay elsewhere, then that requires different reporting.

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

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