Two Properties

two housesToday TaxMama hears from Stephanie from Minnesota, who tells us. “My husband and I own two homes.  My sister is currently renting our first home from us and we live in the 2nd home.  Can we claim both homes’ interest on our taxes?  Does my sister qualify for a renters credit if we claim both homes?” 

Dear Stephanie,

Certainly you may deduct the mortgage and taxes on your personal residence on your tax return.

As to the second residence, it sounds as if your sister is a tenant and you are renting the house to her.  You need to report the rental income on Schedule E. If she is paying fair market rental rates, you may take all the expenses on the Schedule E – the interest, property taxes, insurance, repairs, etc. And depreciation. Your rental loss might be fully deductible if your modified adjusted gross income is less than $100,000. (Between $100K – $125K, the rental loss phases out – over $125K, it all gets suspended.)

You can read more about ‘Fair rental price’ and some examples, here.

However, the losses you don’t use will be suspended and you will be able to use them in the future. http://www.irs.gov/publications/p527/index.html

And yes, your sister should qualify for the renters credit, if she meets all other criteria in your state.

If she is not paying full rent, your rental is more of a personal or hobby situation. Your expenses may only be deducted up to your income. The losses won’t be suspended. They will go away forever.

If you are making a gift of the use of the home to her, and she is not paying rent,  you could pick up the interest and property taxes on your Schedule A as a vacation home, or second home. 

But the problem is – she is paying rent. So you will have to see if you qualify for the full rental treatment of the losses.

Personally? I’d sit down with a good, local tax pro and have them help you sort out last year – and make plans for the best tax advantages for the future. That way, both you and your sister will end up with the best deal.

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

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  • IRS Pubication 527, Chapter 5 :: Fair Rental Price
  • IRS Publication 527 :: Residential Rental Property
  • 2 thoughts on “Two Properties

    1. Herb Farrington says:

      The phase-out of rental losses is at the rate of 50%. Therefore, the phase out is actually from $100,000 to $150,000 of modified AGI. In other words, rental losses are not completely phased-out until modified AGI reaches $150,00. If modified AGI is $125,000, then only $12,500 in rental losses are phased out.

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