tax implications of rental income?

[Anonymous]

We are putting a townhouse on the market, but may need to rent it out if it doesn't sell. We also own another home where we will be living. My understanding is that we can deduct the interest on two mortgages (and the property taxes for both properties) but that we need to declare the rental income as income. Seems like we will end up owing significantly more taxes---how do people swing this? Is the point just to hold on as the property keeps appreciating? Doesn't seem like such a good deal to me if only renting for the short term... Won't we also have to pay capital gains on any profits from the rental property if we sell after we have not been living there?

[Anonymous]

Yes, you have to declare rental income, but you also will be able to write-off repair and maintenance cost as well as depreciation on rental property.
As for capital gain - of you sell within next 3 years your capital gain will be exempt up to 500K for married failing jointly (assuming it was your primary residence for the last 2 years). However, you'll pay taxes on depreciation recap.
Bottom line - it is complicated tax situation, consult tax professional in advance.

[Anonymous]

The mortgage interest and taxes you pay on the rental property are deducted from the income you make from that rental property. So if you get rental income of $2500 per month and your mortgage plus taxes are $2400 per month then you subtract the $2400 from the $2500 to get your net monthly income. As mentioned above you can also subtract maintenance costs, repair costs, depreciation, and other expenses related to the rental property. It's likely you won't have much income. And some people have a net loss.

When you sell you pay taxes on the depreciation recap as mentioned above.

We did something similar the past two years with our former home that became a rental. Taxes were a bit of a pain, but I figured it out myself. And for us we didn't do it for the income but rather we held on to it in case we wanted to move back. Luckily, it appreciated about 5% while we we rented it out.

[Anonymous]

As others have said, you depreciate the rental in accordance with the regulations. This probably will wipe out the income tax on any rental payments.

Eventually when you sell, you'll owe a 25% recapture tax on the depreciation claimed. And NOT claiming the depreciation isn't an option.

Normal capital gains may also apply depending how long it has been since you've occupied the house. Those taxes are as high as 24%, depending on your income (plus any state taxes).

[Anonymous]

Anonymous wrote:The mortgage interest and taxes you pay on the rental property are deducted from the income you make from that rental property. So if you get rental income of $2500 per month and your mortgage plus taxes are $2400 per month then you subtract the $2400 from the $2500 to get your net monthly income. As mentioned above you can also subtract maintenance costs, repair costs, depreciation, and other expenses related to the rental property. It's likely you won't have much income. And some people have a net loss.

When you sell you pay taxes on the depreciation recap as mentioned above.

We did something similar the past two years with our former home that became a rental. Taxes were a bit of a pain, but I figured it out myself. And for us we didn't do it for the income but rather we held on to it in case we wanted to move back. Luckily, it appreciated about 5% while we we rented it out.

I thought the rule was the you can expense the interest you pay on the mortgage, but you don't net the principal payment against the income.

[Anonymous]

Anonymous wrote:

Anonymous wrote:The mortgage interest and taxes you pay on the rental property are deducted from the income you make from that rental property. So if you get rental income of $2500 per month and your mortgage plus taxes are $2400 per month then you subtract the $2400 from the $2500 to get your net monthly income. As mentioned above you can also subtract maintenance costs, repair costs, depreciation, and other expenses related to the rental property. It's likely you won't have much income. And some people have a net loss.

When you sell you pay taxes on the depreciation recap as mentioned above.

We did something similar the past two years with our former home that became a rental. Taxes were a bit of a pain, but I figured it out myself. And for us we didn't do it for the income but rather we held on to it in case we wanted to move back. Luckily, it appreciated about 5% while we we rented it out.

I thought the rule was the you can expense the interest you pay on the mortgage, but you don't net the principal payment against the income.

That's correct, only interest is deductible, principal obviously not, it is not an expense.

[Anonymous]

There are a lot of expenses you can deduct. Painting, yard maintenance, landscaping, repairs, maintenance, etc.

If you are planning on selling, you may want to consider a strategy where you rent it out to a well screened family without a pet. Then you can start to make the cosmetic improvements you planned to get it ready to sell (painting, window washing, landscaping) and deduct those as rental expenses.

[Anonymous]

As the others have said, you can only deduct the rental property expenses, depreciation, and mortgage interest from your rental income, not your regular income. If, for example, your rental income in a year is $25,000, but your rental expenses are $35,000 you will have a loss of -$10,000 on your tax forms. This is pretty common actually due to depreciation. Say your salary is 200K.

You won't have to pay taxes on the rental income, since you actually have a loss of $10,000 there, but you can't deduct that loss from your job income either. You still pay taxes on $200K of salary, not $190K.

What it usually works out to with a rental property is that you have a loss on paper for tax purposes, but in actuality you might be making a small profit while paying down the mortgage against your rental property. When you sell the house a number of years from now, you can carry forward the loss you had on paper every year to offset some of the gains and recaptured depreciation. You then pay taxes on the remaining profit from selling the house.

[Anonymous]

You should also read up on the new net investment income tax to see if it applies to you as it generally applied to rental income for affected taxpayers.

[Anonymous]

Anonymous wrote:

Anonymous wrote:The mortgage interest and taxes you pay on the rental property are deducted from the income you make from that rental property. So if you get rental income of $2500 per month and your mortgage plus taxes are $2400 per month then you subtract the $2400 from the $2500 to get your net monthly income. As mentioned above you can also subtract maintenance costs, repair costs, depreciation, and other expenses related to the rental property. It's likely you won't have much income. And some people have a net loss.

When you sell you pay taxes on the depreciation recap as mentioned above.

We did something similar the past two years with our former home that became a rental. Taxes were a bit of a pain, but I figured it out myself. And for us we didn't do it for the income but rather we held on to it in case we wanted to move back. Luckily, it appreciated about 5% while we we rented it out.

I thought the rule was the you can expense the interest you pay on the mortgage, but you don't net the principal payment against the income.

Whoops, you are right! Our loan was interest only so we deducted the whole thing.

[Anonymous]

Anonymous wrote:

Anonymous wrote:The mortgage interest and taxes you pay on the rental property are deducted from the income you make from that rental property. So if you get rental income of $2500 per month and your mortgage plus taxes are $2400 per month then you subtract the $2400 from the $2500 to get your net monthly income. As mentioned above you can also subtract maintenance costs, repair costs, depreciation, and other expenses related to the rental property. It's likely you won't have much income. And some people have a net loss.

When you sell you pay taxes on the depreciation recap as mentioned above.

We did something similar the past two years with our former home that became a rental. Taxes were a bit of a pain, but I figured it out myself. And for us we didn't do it for the income but rather we held on to it in case we wanted to move back. Luckily, it appreciated about 5% while we we rented it out.

I thought the rule was the you can expense the interest you pay on the mortgage, but you don't net the principal payment against the income.

I thought this too. We charge $800/mo rent on a house with a mortgage of $900/month. We don't claim $100/month income, we claim $800. It's still $809 that isn't coming out of our own pocket, so it's income.