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?

[VolvoGirl]

Right, just the mortgage interest.  You deduct the principal part by depreciating the cost or FMV over 27 years.

[TomD8 · Accepted solution]

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.

[TomD8]

"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.

[cwoodson28]

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

[TaxGuyBill]

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?

[TomD8]

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.

[cwoodson28]

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)

[SweetieJean]

When you rent it out, you get to claim depreciation...whioh lowers the taxable income.

[TaxGuyBill]

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.

[Opus 17]

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).  

[Hal_Al]

I disagree with the advice: "I would not recommend renting the condo if you can't show a net profit and pay some tax on the income."
Rental real estate is an excellent tax shelter (within the limitations of the rules) and investment. Most small landlords do show a loss, if they have a mortgage. The future tax on the depreciation recapture and capital gains is totally avoided if left to heirs.

[Opus 17]

But if you can't deduct the loss?