Can you claim a mortgage interest deduction AS WELL AS a phantom loss on your home?

Question

I am considering purchasing a home, however, I will only be there for 2 to 3 years. If I buy this home, I would like to rent it out once I leave the area. At current market conditions, I would be about $400 shy per month between rental and mortgage plus expenses. I am curious if you can claim both mortgage interest paid as well as the phantom loss on the rental on my income tax return. This would be my only home and my total family income is just under 150k/year.

Answer 1

Yes, but if I understand you correctly, you will be getting 400 dollars less than the mortgage payment per month. Basically on paper putting you in the hole for 400. This is ok, but the IRS may question you on why you have not rented it for more. This would also make a nice deduction for you, as you can take depreciation on this house as well. And depending on the cost of the house, that could be a huge deduction at tax time as well.

One thing to note though, when you take depreciation on property, you may have to pay it back when you go to sell the property. Always best to talk to a Tax Consultant or do your own research and look up Rental Depreciation on Google to see how other people handle this as well.

In Renting property..
You can depreciate all items in the property.
- Curtains
- Fridge
- Freezer
- Rugs
- etc

The property itself of course
You can deduct re-financing expense over the term of the loan
You can deduct any Real Estate Property Taxes, and Insurance as well.
Don't forget to deduct any utilities etc, lawn care, maid services etc. as well. To keep the home in shape.

And yes.. You can deduct repairs to the property as well.

Good luck with what you are doing.. Depending on your location, you should be careful and do everything you can to avoid ARMS, especially interest only or option ARMS. If you cannot afford a Fixed Rate Loan, go for a smaller house, or look for a better deal. Also, some obvious things here, in the next year or possibly more, the market will be in a downturn depending on where you are. So be smart, and don't buy the home with a 0% down or no money down loan as well. Put at least 10% down, or better yet 20% down.

You can also try to underbid the house by 10%, or get the seller to finance the other 10 - 20% at a lower rate so that you don't have to pay PMI as well. I have known investors to underbid the house, and then work with the seller to close the loan by requesting the same amount as the original asking price, and coming out of the purchase with cash out the house already..

I personally don't recommend doing this, as it is not legal.. Although many investors will say that this is a Grey area.

Good Luck and Good House Hunting

Answer 2

Your income from the rental can be reduced only by actual expenses, not "phantom" expenses. However, you can deduct depreciation on the basis of the home, as well as taxes, repairs, maintenance, etc. These expenditures will likely absorb any additional income you receive over the interest deduction.

A word of warning -- you should consult with a CPA or a tax attorney before you rent the house at all, as they can tell you EXACTLY what you may deduct, and any special limitations or rules that will apply in your case.

Answer 3

For the years you are in the home you can claim the mortgage interest deduction.

Once you move out, you will need to file a Schedule E along with your 1040. The Schedule E will give you the opportunity to offset rents with expenses and you can carry the loss to your 1040.

You can't claim the mortage interest deduction on rental property so you cannot claim them at the same time. Also, you need to make sure your mortgage will allow you to rent the property out. Some don't.

Answer 4

As I understand your question. No.
And yes. After you move out you are converting personal property into business property. No big deal, it is done all the time. The difference is that as a business you take income minus expenses, just like any business. Mortgage interest is just an expense like taxes, maintenance, management costs, etc. With real estate you do get to depreciate the property.
As a side note, if you will not be in the area, it may be tough to manage the property.