DelphiFAQ Home Search:
General :: Outside the Cube :: Finances :: Tax Deductions


Articles:

This list is sorted by recent document popularity (not total page views).
New documents will first appear at the bottom.

Featured Article

An important detail on mortgage interest deduction for landlords

Question:

Does it matter how high my mortgages are on each property? Isn't the interest tax-deductible regardless on which property secures the loan?

Answer:

In many cases, it will not matter. However, I ran last year into a situation where I found out, it does matter for me now.

Simplified example:

- earned annual income of $110k
- primary residence, mortgage interest $50k
- 3 rental homes, total mortgage interest $50k
- 3 rental homes, total rent +$50k
- 3 rental homes, depreciation $50k

Taxable income:
+$110k - $50k - $50k + $50k - $50k = $60k

It all gets lumped together, about $60k taxable income.

Now a small change - higher earned income:

- earned annual income of $300k
- primary residence, mortgage interest $50k
- 3 rental homes, total mortgage interest $50k
- 3 rental homes, total rent +$50k
- 3 rental homes, depreciation $50k

Once the AGI is over $150k, you no longer can deduct passive losses (rental interest, rental depreciation) from earned income.

Taxable:

Earned income: $300k - $50k = $250k taxable
Rentals: -$50k + $50k - $50 = -$50k = a loss

You can carry this loss forward and it will help you when you sell those rental properties.

I personally am in that situation. I found out about it in November 2006. I wish I had found out about it in JANUARY 2006.

The solution is to maximize the loan on your primary residence. The following would look better:

- earned annual income of $300k
- primary residence, mortgage interest $100k
- 3 rental homes, total rent +$50k
- 3 rental homes, depreciation $50k

Rent and depreciation still cancel each other out.
But the taxable earned income goes from 250k to 200k.

It was too late to do something about that in November.


Generated 8:00:53 on Feb 21, 2017