Tax break on owning a rental?

Question

What kind of tax breaks/benefits does a home owner receive when putting a home on the rental market...or what can we deduct? Our renters are paying less for rent than we owe on the mortgage. So we're making up the difference out of pocket($500 a month). We're paying a property manager($120 month) and we had to make about $2,000 in fixes and improvements to get the house ready. We're military and had to move, we couldn't sell the house in this market so we put it up for rent. I'm keepiong detailed records. Will we get tax benefits from this?

Answer 1

Your maintenance/repair costs, property management, taxes are all deductible for a rental property.  You can also depreciate it.  However, all rental income is taxable.  There is an IRS publication that deals with this.

Answer 2

  Zen, Coolest, SRC, I hope you don't mind my second guessing your answers, but they were not very complete.  I would like to try to add some clarification.

  The rental income is reported as income on Schedule E.  Expenses, such as repairs (not improvements) management fees, depreciation of the house (not land), are all deducted as rental expenses, reducing the rental income.  Mortgage interest is deductible as a rental expense from the time you started renting it out, as are real estate taxes.  the remainder is still deductible as a personal expense on Schedule A.  If you have a net loss on the rental, it reduces your gross income.

CAUTION 1:  If the rent you are charging is below the going rate in your area, you may not take the loss.

  CAUTION 2:  If your state has a homestead tax break, you may lose it.  Check your state regulations.

  CAUTION 3:  When, or if, you sell your home, you will have a much more complex tax situation.  Ask me more at that time.

Answer 3

You can treat it as a rental house business. You must show your rental earnings and expenses for the year to determine profit or loss.  

Caution, if you treat the home like a business and write off your expenses, then decide to sell the home you may be subject to capital gains tax on any profit you made from the sell of the home.  

I would discourage you from treating your home as a rental house business beings you're in the military and had to move, unless you have bought another home.  If this home is still your primary residence, many of the expenses can still be written off your personal income tax, such as property tax, mortgage interest, some improvements.

If you do decide to treat the home as a rental house business, I would have a certified public accountant do your tax return, there are many conditions that should be reviewed.

Good Luck To You

Answer 4

When you prepare your taxes you are going to have to report the rental as income even though it is not making the mortgage payment and your are still paying more. You can not use the mortgage payment as a deduction because that is an asset. Also remember that you will not be able to use that property as your homestead when you do your tax return.

Now the good news. Keep the receipts on the property management company and all the expenses for the house. The improvements can be deducted all at once or carried out as adding value to your property and then depreciated. You will have to talk to your tax consultant about that. Hope this helps you get started. Oh also, insurance on the property, property taxes, minor maintenances through out the year all of this can be a deduction during tax time :) Good Luck.

Answer 5

You report your rental income and expenses on schedule E.

You can deduct mortgage interest, property taxes, insurance, interest, management fees & commissions, repairs & maintenance, cleaning, utilities, depreciation, etc.

Keep careful records on depreciation as it is subject to recapture when you sell the home whether you claim it or not.  You depreciate the cost of the home (but NOT the land, so you need to break this out) on a 27.5 year straight line schedule.

Make SURE that you retain final approval of all tenants and major repairs.  This meets the test for "Active Participation" which is required for you to be able to show a tax loss on the activity.  You can take up to $25,000 in passive activity losses each year as long as you actively participate in the management of the property.

Improvements MUST be depreciated, you cannot write off the entire cost as another poster states.   That will get you in dutch with the IRS if you're audited.