This is VERY helpful, I did not know that I could claim the taxes and interest and claim the home as a second home for 2021.
Just keep in mind that for 2021, if the total of all your itemized deductions does not exceed your standard deduction, than itemizing has absolutely no impact on your tax liability. But if you have a mortgage on your primary residence also, itemizing the mortgage interest on SCH A for both properties may contribute to your itemized SCH A deductions exceeding your standard deductions. It depends on a number of factors like your filing status, other itemized deductions and the such.
In 2021, I had so many expenses on homes purchased that were not rent ready and will become a second home. This will then result in quite a lot of losses.
For your 2021 taxes, a vast majority of your "selling/buying expenses" will not be deductible. But when you convert the property to business use on your 2022 taxes, you will be able to claim those expenses one way or another on the 2022 return. That's why I advised you to keep all your paperwork. Basically, it works like this:
- Costs associated with acquisition of the loan are amortized and deducted (not depreciated) over the life of the loan. This will start on the date you convert the property to a rental and it's move-in ready for a tenant. Examples of this type of costs would be loan application fees, a property survey if (and only if) required as a condition of loan approval.
- Costs associated with acquisition of the property are added to the cost basis of the property and depreciated over time. For residential rental real estate, depreciation is over 27.5 years with depreciation starting on the date the property is placed in service and is move-in ready for a tenant.
Does this lower the amount of money I will get approved for by the underwriter?
No. But why are you asking this question now? I'm of the understanding you already have a mortgage on the property, therefore it's already been underwritten and the deal is said and done. Are you attempting to refinance this property maybe? What's going on that would prompt the question at this time? I ask, because maybe there's something going on I'm not aware of, that could have an impact on the 2022 tax return?
Here's some more information concerning depreciation that you may or may not already know.
Many folks are of the impression that depreciation is a permanent deduction. It is not. Others are of the impression they don't have to take depreciation if they don't want to.
In the future when you sell or otherwise dispose of the property, you are required by law to recapture all depreciation taken and pay taxes on it. A few things about that.
1. Recaptured depreciation is added to your AGI in the year of recapture and therefore has the potential to bump you into the next higher tax bracket. It just depends on the numbers.
2. Recaptured depreciation is taxed anywhere from 0% to a maximum of 25%
3. If one thinks they can get out of this by not taking depreciation at all, that's not true. If you don't take depreciation, then when you sell or otherwise dispose of the property, you are required to recapture the depreciation you "should" have taken, and pay taxes on it per item #2 above.
Since you won't be dealing with the rental aspects of this until next year when you complete your 2022 tax return, you may find it informative and helpful to peruse the most recent version of IRS Publication 527 titled "Residential Rental Property (Including Rental Vacation Homes)" at https://www.irs.gov/pub/irs-pdf/p527.pdf Of the things it covers that may be of interest to you, are how to treat costs associated with your purchase of the property. That starts on page 7 center column, section titled "Cost Basis".
Note also that when entering the property in the SCH E section of the program, the software will ask you for all those additional costs that get added to your cost basis.
