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.
Why can't you deduct the mortgage interest? You should be able to. It all goes on Schedule E for Rentals.
Mortgage interest, property taxes, repairs and maintenance, and depreciation are all deductible against rental income for a rental property.
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?
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>
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.
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.
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?
" I'll end up owing more because the rental income exceeds the deductions I can make"
[need to fix this, hang on a sec]
" 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.)
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
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
$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.
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.
Right, just the mortgage interest. You deduct the principal part by depreciating the cost or FMV over 27 years.
You can expense mortgage INTEREST, but not any principal repayment. Usually interest is the majority of your mortgage payment, unless you are nearing the end of the loan's term.
"my guess is the total rental income is greater than all of the expenses you mentioned"
If your rental income exceeds your rental expenses, you'll have a profit.
Yes, you'll pay taxes on that profit, but you'll still be left with a net profit after taxes. Taxes don't take 100%.
I don't understand why you see that as a problem.
The reason I see it as a problem is because technically that income isn't profit.. I'm using that rental income entirely to pay the mortgage..
Situation 1: I lived in property and expense the interest and taxes but couldn't expense depreciation, repairs/maintenance, etc but also did not have any rental income.
Situation 2: I rent property and still can expense the interest and taxes AND now can also expense depreciation, repairs/maintenance, etc BUT now also need to account for rental income. Since this rental income is used entirely to pay mortgage and because mortgage is not deductible and because the expenses will likely not exceed or match this rental income.. I am left with a "paper income" of sorts and have to pay tax on it when there was in reality no real income.. Also, any additional expenses to match or exceed the rental income will be coming out of pocket so it makes no sense to spend more either..
that is my dilemma, I was wondering 1. whether all of that is true because I'm not a professional in real estate or tax and 2. whether there was a way around it, which it doesn't seem like there is
There is a difference between "profit" (paper income) and "cash flow". Yes, the rental will not benefit your cash flow. However, due to (1) tax depreciation, (2) eventual appreciation of the property value and (3) gradually increasing rents, you eventually will have a profit.
However, take a step back. What is your purpose in renting it out? Where would you live if you move? Do you need the cash flow, or are you okay with a long-term investment for the property? Are you sure that you can not charge higher rent to have a cash-flow profit?
You'll still have to pay that mortgage whether you rent out the property or not. Your rental income will offset part (or possibly all) of that payment. I still don't see a problem.
Moving out closer to work. Renting an apartment. I am okay with the long-term investment.. basically the rent should cover almost all of the mortgage.. I will pay about $50 out of pocket every month + repairs/maintenance as mortgage. And yes I am fairly certain I am at or near the top end of the rent spectrum (property managers are analyzed comps and such)
My main concern isn't cash flow although maybe I'm missing something and maybe it should be. My main concern is a drastic change is tax owed. As i mentioned before, when i lived in the unit, I was not subject to any rental income but could deduct the interest and taxes.. as I move out, I can still deduct the interest and taxes and some additional expenses but now am on the hook for this rental income which far exceeds the "additional expenses" by my calculations.. now I have to pay taxes on this "paper income" because not only can I not expense the mortgage but this rent that I'm collecting is now considered income when in reality it isn't because it's going entirely to pay the mortgage. (I guess the real reality is that the rent IS actually income since someone else is paying my mortgage but for the purposes of my example I wasn't considering it to be)
When you rent it out, you get to claim depreciation...whioh lowers the taxable income.
You can't compare it to when you lived in it; you need to compare it to when you are renting an apartment (without the Itemized Deductions).
Let's say you sell the home and rent the apartment. You are already 'losing' your deduction for Mortgage Interest and Property taxes. Assuming that you Itemize your deductions, that is already increasing your tax.
Now compare it to renting out the home. You now 'get back' the deduction for Mortgage Interest and Property Taxes to offset part of the rental income. There is a good change that the Standard Deduction would be larger than your Itemized deductions, which sort-of effectively means you are getting an 'extra' deduction over Itemizing your deductions.
Buy the CD/download version of TurboTax. Enter your estimated 2017 information, first as if you do NOT rent out the house (don't deduct the Mortgage Interest and Property taxes as Itemized deductions). Then "save as" the file and enter the information for renting the house. Then compare the results. That will give you a better idea for what the tax results would be, and give you more to base your decision on.
If you don't want to pay income tax, just leave it empty. (Of course, you won't have the money.)
On personal property, you can deduct all your property taxes, and you can deduct mortgage interest on a first and second home.
Once you convert a personal home to a rental, you must pay tax on your net income (profit after expenses). Your expenses include mortgage interest and property taxes, but also hazard insurance, utilities you pay, repairs and maintenance, condo association fee, etc.--things that are not deductible when they are personal expenses but are deductible when they are related to generating income). You also deduct depreciation (basically wear and tear). Depending on the rent you charge, you should still make a profit, and you pay tax on the net profit after expenses.
If your expenses are more than your income, then you have no profit and pay no tax, but in that case you should probably sell the condo outright instead of renting it (as a financial matter, not a tax matter).