Will be renting out the condo. As I understand it,I will pay taxes on the rental income and also cannot deduct the mortgage interest leading to a double whammy of sorts?

[cwoodson28]

I am trying to better understand how this will affect my taxes and tax return.  Does renting out a condo lead to a general rise in taxes owed and reduce your returns or in general is this more of a wash..? Especially if you can no longer deduct mortgage interest and your taxable income will also rise with the rental income.  I understand that you can deduct depreciation but the land is worth far more than the property itself.

[VolvoGirl]

Why can't you deduct the mortgage interest?  You should be able to.  It all goes on Schedule E for Rentals.

[Zbucklyo]

Mortgage interest, property taxes, repairs and maintenance, and depreciation are all deductible against rental income for a rental property.

[cwoodson28]

Well before when I was living in the condo I was benefiting from deducting the mortgage interest & property taxes from my gross income.. but now it seems I will deduct them from my rental income instead.  Essentially the only difference to all of this if I'm understanding correctly, is that I will now owe taxes on the rental income minus repairs and maintenance and depreciation (both of which I wasn't able to do while living in the property).  Is that correct?

[Zbucklyo]

You can also deduct utilities, hazard insurance, condo fees, etc.. There are certain rules about rental property that complicate things a bit.  First, while you get to deduct depreciation on a yearly basis, when you sell the property, you are required (in most cases) to pay tax on the depreciation that you took while you owned the property.  As always, there are exceptions to that, but that is the general rule. Effectively, this makes depreciation less of a free lunch than it might first appear.  Second, you must be an "active participant" in the real estate activity" to deduct losses from rental property.  Third, unless you are a real estate professional, you are limited to deducting 25,000 per year in real estate losses (12,500 if married filing separately).

However, any losses than you can't deduct in a given year are considered passive activity losses than can be carried over to future tax years.

See Publication 527 for more information:

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p527.pdf">https://www.irs.gov/pub/irs-pdf/p527.pdf</a>

[Opus 17]

I would not recommend renting the condo if you can't show a net profit and pay some tax on the income.  That's the whole point anyway.   Renting to get a paper loss that you can use to reduce your other tax has rules, and isn't worth it.  (Showing a profit of $1000 and paying $250 tax leaves you "up" $1000 compared to showing a $1000 loss and deducting it from your other income.)

If you are renting at a loss you aren't charging enough rent, and if the market won't bear the rent you want to charge you should probably just sell it, or leave it empty if you want to keep it as a second home and home it appreciates in value.

[Hal_Al]

As your primary or second home, mortgage interest and real estate taxes are deductible as a itemized deduction, on schedule A. That only gets you an additional deduction, above what the standard deduction would have gotten you.

As rental property, you get to deduct not only mortgage interest and real estate taxes, you get to deduct insurance, repairs, utilities, condo assoc fees, your purchase price (thru depreciation) and any other expenses. And you get to deduct then directly from income. That is you get those deductions in addition to the standard deduction, not instead of.
Example: Married Home owner has $15,000 in itemized deductions. His standard deduction is $12,600. he only gets an additional $2400 in deductions by owning a home. But the condo landlord gets the $15,000 in addition to the $12,600.

[cwoodson28]

Hal_Al, that is true, on top of the mortgage interest and property taxes, I can deduct all the other expenses you mentioned, however, the problem is that my guess is the total rental income is greater than all of the expenses you mentioned (especially considering the depreciation is not much since as I mentioned previously the land is worth far more than the property itself).. that was my concern because in the end, I'll end up owing more because the rental income exceeds the deductions I can make.. whereas when i lived there, sure i couldn't deduct the expenses you mentioned but at least there was no rental income and I was still able to deduct the interest and property taxes..   

One thing that you and Zbucklyo mentioned was that I am able to deduct utilities.. how so?  I am planning to have my tenant open up their own account with the local water and power company.. how would I deduct the utilities in that situation or was the assumption that I would pay the utilities for this rental property and be reimbursed by the tenant?

[Hal_Al]

The assumption was that you paid for the utilities.

[Opus 17]

" I'll end up owing more because the rental income exceeds the deductions I can make"

[need to fix this, hang on a sec]

[Opus 17]

" I'll end up owing more because the rental income exceeds the deductions I can make"

OK, lets try again.

Let's start with $1000 a month in taxes and interest.  If you take that off your schedule C, your personal income tax rises by $3000/year.

So now, let's rent it for $2000 per month.  Your deductible expenses might be $1200 per month (the same taxes and interest, plus hazard insurance and depreciation and any utilities you pay.)  You pocket $800 per month, or $9600 per year.  Your income tax on the $9600 is $2400.

When you account for the $2400 in new tax, plus the $3000 in lost schedule A deduction, you are still $4200 ahead.  This is a problem?

"the land is worth far more than the property itself"
That makes no sense.  If the fair market value of the condo is, let's say, $200,000, that includes the land or any land rights or shares of the common land that go with the condo.  The land can't be worth more than $200,000 per shareholder if the overall sales price is only $200,000 (unless something very strange is going on, like the condo is full of asbestos making it more expensive to demo than it's worth.)

[cwoodson28]

I am not a real estate or tax professional so maybe I am missing something here but my mortgage including HOA fees is about $2250 not including insurance.. I am projecting to only collect $2200/month leaving me with a $50 loss every month.. however as I understand it, this $2200/month or $26400 for the year is considered income and the previously mentioned expenses will be deducted from this number to come up with my taxable liability as it pertains to the rental property.  My problem is that this is additional "income" for which I will need to pay taxes on whereas in the past while I lived in the unit, I was able to avoid it.  I was wondering if there were any ways to avoid this but it doesn't seem like there is unless the expenses do in fact exceed the rent collected

[cwoodson28]

Opus, with respect to my comment about the land being worth far more than the property, I was just going by my last property tax bill where land was valued at about $285k and the improvements at $85k. Again, I could totally be wrong here because I'm not in the industry but that's just what it looked like to me

[Hal_Al]

$26,400 is not considered taxable income. The $26,400 of rent received minus $27,000 of expenses is not "additional 'income' for which you will need to pay taxes on". It's a deductible tax loss. The loss gets even bigger when you add in insurance and depreciation. Even if you're ineligible for the loss, because of high income; you still get to reduce the net taxable income to zero and  the loss accumulates for a future deduction.

[cwoodson28]

As I understand it, I thought the $27k mortgage payment had no bearing on the overall tax liability of rental property.  Total mortgage payments made is not found on schedule E anywhere.