We live on 18 acres but don't farm it. A 5-acre field is rented to a neighbor. Rental income is reported on Sch E. How do I calculate the mortgage interest write-off?

[Brent R]

I believe that I can write off both property taxes and mortgage interest on Schedule E for these 5 acres. For the property tax portion, I believe it is to be calculated like this:

(land value / total value) * (5 / 18) * total property tax

In other words, it's 5/18 of the taxes on the land value portion of the property tax statement. Does that sound right?

For the mortgage interest, is the calculation the same? Or can I calculate based simply on 5/18 of the total tax? I'm assuming the former, but the latter would obviously be more advantageous.

If any of the above is untrue and I can't write these off, I'd like to know before being audited. Thanks in advance!

[IreneS · Accepted solution]

Yes - You can deduct a portion of the mortgage interest and taxes on your Schedule E and the rest on your Schedule A.

You equation is good, but it does not take into consideration the house. 

Let’s first divide the value between house and land.  You can check your county tax assessment to be sure, but we’ll say the house is 60% of the value and land 40%.  Then multiply  5/18 * 40%, which is .11.

In the end you get to deduct the total mortgage interest and property taxes, just in different places!

[Brent R]

Thanks for the feedback, and sorry if my original equation wasn't quite clear.  In the first set of parentheses, I was dividing only the land value portion of the taxes by the total value (so excluding the house) in order to determine the percent of taxes on just the land. I believe that's what you were saying as well, just in a different way.

Just so I'm clear, is mortgage interest calculated using the same percentage used for property taxes (e.g. 11% in your example above) rather than on the total interest? That is, would I deduct 5/18 of 40% of the interest, or 5/18 of the *total* interest? I'm assuming the former, but assumptions and federal taxes aren't a good combination. Thanks again!

[IreneS]

Got it--we're both on the right track!  Yes, mortgage interest is apportioned the same way as the property taxes are.