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armyrangr25
Level 1

Rental Property

I'm active duty who owns a house, and had to PCS to another duty station. I'm renting at current duty location for $925/mo. I wanted to keep my home, which has a mortgage of $750/month, so I'm renting it for $895/mo. I understand the $895/mo counts as "income", but couldn't the cost of the mortgage for that property be deducted as an expense? I dont think it's right to expect a military member to not be able to own a home because the military PCSs them every few years, or to penalize them for trying to own one with taxing their rental income, or expecting them to pay a mortgage and cost of rent. Please help.

4 Replies
Carl
Level 15

Rental Property

The principle part of your mortgage payment is no more deductible than your car payment is. Period. The three basic deductions that all rental property owners get is mortgage interest, property taxes, and property insurance. Add to that the other rental expenses such as repairs, cleaning and maintenance (among others) and you're fine. In fact, it is *extremely* rare for rental property to "ever" show a taxable profit on paper at tax filing time. That's because when you combine the mortgage interest, property taxes and insurance deductions with the depreciation you are required to take by law, those deductions alone will be more than the rental income to receive for the entire year. Add to that those other rental expenses you can take, and your practically guaranteed to "NEVER" have taxable rental income as the years pass.

Now the general rule is, if at the time you sell the property if it was your primary residence for at least 2 of the last 5 years you owned it, then you get to exclude any capital gains on the sale from taxation, with a limit.

If filing a single return and "you" were the only owner and "you" lived in the house as your primary residence for at least 2 of the last 5 years you owned it, then your first $250K of gain is exempt from taxation.

If filing joint and you both meet the "lived in" requirement, then the first $500K of gain is exempt from taxation. But wait, there's more since you're military.

For active duty military if you moved before meeting the "lived in" requirement, you have several exceptions available to you if you could not meet the lived in requirement because of official PCS orders.

First exemption, is that the rule for you is "lived in 2 of last 10 years" you owned it.

Next exemption is, you can still claim the exemption for less than 2 years (24 months) with the amount you can exempt pro-rated by 1/24th for each month you "did" live in it as your primary residence prior to your PCS move.

The thing with both exemptions, is that to qualify you have to sell the property while you are still on active duty.

There'a a very good write up on this at https://www.katehorrell.com/capital-gains-rules-for-military-families/ that explains it better than me, with references to the IRS publications. So check that link and the part that will interest you is a few scrolls down the page and is titled "Suspension of Time for Military".

Please use this information to plan your future with this house accordingly.

armyrangr25
Level 1

Rental Property

Thank you so much. Your quick, informative answer was really helpful!

slbranson
Returning Member

Rental Property

turbotax premier on Windows should be walking me through Schedule E . . I think . . but it's not.

 

It says that "So far You're not a Real Estate Professional" and asks:

 

  • if I spend more than 750 hours a year actively involve in real estate (sales, management , etc.)
  • I spent more than 50% of my work-related fime involven real estate
  • None of the above.

I said None of the above and it just skipped the form altogether.

Not sure why I wouldn't be able to deduct property taxes, repair expenses, etc., from gross income.

 

Thanks,

Steve

JulieS
Employee Tax Expert

Rental Property

Here is how to enter Rental information in TurboTax Premier:

  1. Open your return, select Federal, then Wages & Income.
  2. Select I'll choose what I work on.
  3. Scroll down to Rental properties and Royalties (Sch E), select Start or Update on the right.
  4. Answer the first question Yes.
  5. Answer the second question, None of the above and click Continue.

Enter your rental information on the following screens.

 

If you have already entered some information, or carried some forward from last year see the image below. Click Edit (blue arrow) to enter more details or Add another (red arrow) to add a new property.

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