Can I deduct the mortgage, taxes and Insurance for my rental in Puerto Rico from my taxes I file in the U.S.?

[julieskoler]

I live and work in california and file taxes here. This year I bought a rental in Puerto Rico and am wondering what I can deduct from the taxes I file in the U.S. and what I have to deduct from taxes I will file in PR. For example: which expenses can I deduct from when I file in the U.S.: Mortgage, Taxes and Insurance, Homeowners Association, operating expenses, advertising expenses, start up, etc. Where can I find more information about this?

[Carl]

Yes, to all your questions. However, it's important to complete any foreign tax return first, and pay any and all foreign taxes first. That's because those are deductible expenses on your U.S. tax return. Also, pay attention to the screen that asks for the property address of the rental property, and make sure you select the "foreign address" radio box. That's because foreign rental property is depreciated over 39 years, whereas U.S. rental property is depreciated over 27.5 years. So this particular selection matters for you, big time.

[SweetieJean]

Is Puerto Rico (a U.S. Territory) considered to be a foreign country vis-a--vis the depreciation period?

[Carl]

Good catch. I just checked, and when indicating the property is in the U.S., in the state pull-down menu Puerto Rico is an available selection. So the property would be depreciated over 27.5 years and PR taxes are deductible from the federal return, just the same as state taxes are. However, I do note that there is no "state module" for PR.

[julieskoler]

Thank you so much for your answers! If Puerto Rico is in the state pull down menu, how is it also considered for foreign taxes on my US tax return? Is that because of it's dubious political status as a US commonwealth? Also, if I did not have any income this year, just losses, do I need to file income taxes in Puerto Rico at all?

[Carl]

The main thing to understand is that you can not use TurboTax to prepare your PR return. (which would be the equivalent of a state return if you were in CONUS). As for filing PR taxes, I fully expect you have to. Since you do "in fact" have income in PR, the only way possible for PR to know it's not taxable, is if you file a PR return. Otherwise, I'd expect PR to fully tax every single penny of income produced in PR.
Be aware also, that you will need to prepare and file your PR return before you can even start your federal return. That's because any taxes you pay to PR are deductible from your taxable income on the federal return.

[julieskoler]

HI carl, you have been a huge help. I have an accountant do my taxes, but he does not understand how to consider anything for Puerto Rico. I am looking for an accountant who understands how to manage Puerto Rico on my U.S. tax return, and  who may even be able to file my taxes for PR (double goodness, if it exists). Do you know of any resources where I can find an accountant with knowledge of how to manage PR? This is not something I want or can do myself. I was looking into turbo tax or quickbooks to work with the record keeping side. My friend recommended quickbooks. would you agree? In gratitude.

[Shaller]

Hi Julie,

like you I have bought a property (in Old San Juan) in Puerto Rico.

After much of renovation and preparation I finally got rental income in 2019. so now I am faced with the same issue you were faced with regarding taxes. Would you mind sharing your experience? I actually wish we could exchange notes, there are so many new experiences I made through this purchase....

stefan

[Shaller]

@ julieskoler.

stefan

[Carl]

Do you know of any resources where I can find an accountant with knowledge of how to manage PR?

The only reasource I'm aware of for your situation is https://traveltax.com/small-business-and-normal-non-travelers/ with there home age at traveltax.com. I have no opinion on this company and am not personally aware of anyone who uses them. Just one I've heard about from a friend, who heard it from a friend, who heard it from a friend, who heard it........ You get the picture.

I was looking into turbo tax or quickbooks to work with the record keeping side. My friend recommended quickbooks. would you agree?

I've been using QB since I started my own SCH C business over 15 years ago. Works great for me. If at tax time if you and your accountant/tax preparer are using the same version *AND* you have properly classified everything in the QB program, it really helps streamline the tax prep process. For me, I can just import my business data straight out of QB and into TTX each year. Then I review it and "always" have to make a few changes/corrections. But still, it saves me an emmense amount of time in the book keeping arena throughout the year when it comes to taxes.

Now I myself use the desktop version of QB 2019 that I installed on my Windows 10 computer. (Available for MACs too.) I have friends who use the online version and they love it. However, from what I see the online version just doesn't have nearly as much flexibility and versatility as the desktop version I use. I also see the desktop version as more user-friendly. My friend who uses the online version thinks it's the best thing since sliced bread. But I attribute that to the fac they've never used the desktop version and therefore have nothing to really compare the online version with.

So I may be biased when I recommend the desktop version.  But hey, that's my two cents. 🙂

Both versions have their pros and cons. For me, the desktop version has less "cons" for my specific needs, than the online version does. But depending on your specific needs (such as dealing with what is essentially "foreign" income in a sense) I don't know which would be better for you. But if you're asking my two cents on that, I would suggest that you deal with the desktop version "first" if you're wanting to try both.

[m-chan]

Puerto Rico is Not considered a Foreign country so why is it considered considered Foreign Non-residential property depreciable over 39 yrs for rental real estate purposes?