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You would usually determine the percentage by the size of the apartment vs the rest of the building. If there are 2 apartments, for example, and you rent one of them, you would use the square footage of that apartment as a percentage of the total building square footage. You would then apply that percentage to the the mortgage and interest.
Say the rented unit is only 10% of the building, you would allocate 10% of interest and tax to that unit, and the rest to Schedule A.
It's much simpler if all the units are the same size. For example if there are 2 apartments that are pretty much equal, you could just choose to allocate 1/2 of the interest and tax to that rented unit.
You would usually determine the percentage by the size of the apartment vs the rest of the building. If there are 2 apartments, for example, and you rent one of them, you would use the square footage of that apartment as a percentage of the total building square footage. You would then apply that percentage to the the mortgage and interest.
Say the rented unit is only 10% of the building, you would allocate 10% of interest and tax to that unit, and the rest to Schedule A.
It's much simpler if all the units are the same size. For example if there are 2 apartments that are pretty much equal, you could just choose to allocate 1/2 of the interest and tax to that rented unit.
Follow-up question - if you own and live in a 2 unit (equally sized) multi-family house, does that mean you MUST deduct 50% of mortgage interest and real estate taxes on Schedule A and the other 50% to Schedule E? If I wanted to deduct the full amount of mortgage interest on Schedule A, is that allowed?
If I wanted to deduct the full amount of mortgage interest on Schedule A, is that allowed?
That makes no sense, since your SCH A itemized deductions do not kick in until they exceed your standard deduction. Then, only the portion that exceeds your standard deduction is of any help.For a married couple filing joint, it would take at least $25,200 of itemized deductions before anything over that would help. I don't know of very many joint tax returns that can achieve that each and every year.
Where as your SCH E deductions are 100% deductible, regardless.
Thanks for replying. I file as single, so have the lower standard deduction, which I exceed each year. Unless I've misunderstood, I will get the mortgage interest deduction whether I take it as an itemized deduction on Schedule A or a reduction of income on Schedule E. My rental situation is perhaps unique in that all the expenses (if I include half of real estate taxes and half of mortgage interest) exceed the rental income. In which case, I may prefer to take the full mortgage interest deduction on Schedule A. But only if that's allowed of course.
@racer914 No, unfortunately you can't choose where to put that mortgage interest deduction. Since you have already exceeded the standard deduction then there is no difference to your bottom line between entering it on sch E or sch A UNLESS your income is high enough that you can't deduct a rental real estate loss. In which case moving it to schedule A makes sense. Which is why the IRS requires you to deduct it where you used it.
My rental situation is perhaps unique in that all the expenses (if I include half of real estate taxes and half of mortgage interest) exceed the rental income.
That's not unique at all. In fact, it's expected. It is not common for long term residential rental property to actually show a profit on line 26 of the SCH E. It's more common to show a loss.
When you add up the rental deductions of mortgage interest, property taxes, insurance and add that to the depreciation you're required to take, those four items alone are usually enough to exceed the total rental income for the year. Add to that the additional allowed rental expenses such as repairs and maintenance, and you're practically guaranteed your expenses will exceed the rental income every year.
With current tax law, when your rental expenses exceed your rental income and your AGI is below the threshold, up to $25K of those excess expenses can be deducted from other ordinary income, provided you actually have that "other" income that would be taxable otherwise.
After that, any excess loss is just carried forward to the next year.
Also, since the mortgage interest is a SCH E expense, that's where you have to claim it anyway. Your only choices are to either claim it as a SCH E deduction, or don't claim it at all. Trying to shift things around to make it more beneficial to you is most likely, not exactly legal in this case.
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