Calculating taxes on rental income

[IronWomen]

Scenario: Me (USA citizen) and my spouse(non-resident of USA) co-own a property in USA. We moved out of States in mid-2024 and the property is on rent since then.

ITR status: Married filled jointly for 2024 as we both had USA income for few months before we moved out.

Questions: 

1- Do we need to continue file ITR as married filling jointly as we co-own the property? My understanding is that my spouse doesn't need to file taxes in USA being a non-resident of USA and has no USA income.

2- How much taxes are we liable to pay on the rental income? 

3- We have mortgage on this property that we are planning to close by pre-paying. Is it advisable to keep the mortgage or close it for the benefit of ITR? Is there a deduction on mortgage that we can show by keeping it such that it can lower our taxes on the rental income?

4- Is there a calculator that we can use to pre-calculate the taxes on our rental income after all the deductions?

Thank you!

[pk]

@IronWomen 

(a) How did you file 2023 return --- MFJ / MFS/?

(b) Which country is your tax-home now ?  Is this the same country your NRA spouse  is a citizen of ?

1- Do we need to continue file ITR as married filling jointly as we co-own the property? My understanding is that my spouse doesn't need to file taxes in USA being a non-resident of USA and has no USA income.

Ans:  As a US citizen you are required to file US Federal Return and taxed on your world income.  If you choose to file as MFJ, you and spouse will have to request that spouse be treated as a "Resident for tax purposes", expose her world income to US taxes. However, at that point you both can use  Foreign Earned Income Exclusion or Foreign Tax credit to reduce double taxation burden.  Also any tax treaty between US and your taxhome country may affect things.

2- How much taxes are we liable to pay on the rental income?

Ans:  For US tax purposes, rental income is reported on Schedule-E, allows expenses (such as property taxes, mortgage interest, repairs/maintenance  etc. etc. ) and depreciation to used as a deduction. Please see this Pub from the IRS --- >  2024 Publication 527

3- We have mortgage on this property that we are planning to close by pre-paying. Is it advisable to keep the mortgage or close it for the benefit of ITR? Is there a deduction on mortgage that we can show by keeping it such that it can lower our taxes on the rental income?

Ans: Please see answers and refs. to your question 2 above.  While mortgage interest  is both an expense and a deduction against  rental income, Only you can decide whether paying off the mortgage is of benefit to you or not.  It is generally tax neutral 

4- Is there a calculator that we can use to pre-calculate the taxes on our rental income after all the deductions?

Ans:   You can always use TurboTax dowloaded version -- 2024  ( my favorite for such is Windows version of Home & Business --- this will also cover your complicated  FEIE/ FTC etc. ) to compute what is likely to happen in 2025 filing -- you can use the What-if worksheet.

While I have answered your questions in general, please answer my questions  above  for a more specific reply.  I will circle back once I hear from you -- yes ?

[IronWomen]

@pk 

Thank you for your reply. Here are the response to your questions:

1. 2024 taxes filled as MFJ, same for 2023.

2. India, and yes, my NRA spouse is citizen of India.

Doing little bit of research, I also see an option for MFS for both of us. That way, we split the rental income and expense in half. Based on some calculators, I may not pay any tax after the deduction and my spouse will pay about 10% as income tax, Spouse files 1040NR claiming ECI.

Prepaying the mortgage was an intent to get some cashflow but we were worried about the tax liability, given the interest portion will be taken away from the deductions. But in the end, it doesn't seem to making a huge dent on what we end up paying as taxes. 

[pk]

@IronWomen , Namaste ji

If you need more discussion on this ---- please consider PM me   ( just no PII -- Personally Identifiable Information).  I am on PST.

I am not sure that I understand ( I lack full info obviously) why MFS is giving you a better outcome -- also to note that since you have filed MFJ priorly, your spouse NRA has been treated as Resident for tax purposes. If you change this back to NRA, she can never go back to Resident ( if that becomes   taxwise  beneficial).  Please consider this-- PM is the best way since it is private and viewable by other posters

Where in India are you ?

Namaste ji

pk