Question: If home equity loan interest is deductable for my house for rental?

(Posted by: Ming S on 2010-01-09 07:13:02)

1. I have one old house ($200, 000 market price) and I already paid off two years ago. Now I am going to buy a new house ($300, 000). 2. I want to make $100, 000 as home equity loan from my old house and pay this $100, 000 to my new house. 4. this equity loan interest rate is 5 %. So, one year interest I should pay is $6000 3. After I move in the new house, I want to rent out the old house. 5. This old house rental may be $1500/ Month. So, the total rental for one year is $18, 000. 6. for the old house, the property tax is $5000; the insurance is $1000. my question is that is that $6000 can be counted as cost of rental (tax deductable)? Thank you in advance. Thanks all and it looks like a very complicated tax issue. I would read all answer carefully. The purpose of this $100, 000 equity loan against the old paid- off house is to pay the new house loan. - - just re- state it.

Posted by: bobby769 on 2010-01-09, 07:35:49

You should speak w/ a tax professional but here's what I found.\ This was taken from here: investopedia.com/ articles/ pf/ 06/ MortIntTaxDeduct.asp "You must use that property at least 14 days during the year. If your second home is a rental property, you must use it more than 10% of the time that the property is rented out. If your rental property does not meet these criteria, the interest cannot be listed on Schedule A and must instead be listed on Schedule E. " And this from here: mymoneyblog.com/ archives/ 2009/ 06/ mortgage-interest-tax-deduction-on-rental-property.html "If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527. " I would suggest you take a closer look at pub 527. irs.gov/ publications/ p527/ According to 527 the interest would be considered a rental property expense that can be deducted from the property's income, thereby reducing the rental income that gets taxed.

Posted by: A_Kansan on 2010-01-09, 07:41:34

It depends on the purpose of the loan. If you have the loan on the soon to be rental property as a stand alone one, it is possible to use part or all of the money in another way other than on that house. Income from that property is still regarded as your income, but you will need to treat the house like it is a business. Get another checking account for the rental and get an accounting program, Quick Books to track expenses and income. This shows the IRS that you are conducting an actual business and treating it as such. Show the loan as a debit to your checking and a credit on a long term liability, a.k.a. mortgage due with an asset, the house and an expense the interest paid. You can then simply do an owner's withdrawal and take the money out of the account. As an owner of a business you are allowed to do that. Unless the house is in a corporation or other legal entity, your taxes would not change. If you cross collateralize the loans, meaning you have one loan with leans on more than a single property, the reason for the loan becomes important. For instance, you can actually get a loan on your present residence to purchase a rental property. The reason for the loan is business and the interest would be an expense on the earnings of the rental property. I would recommend against cross collateralizing your primary residence as if your rental ambitions fail they can actually foreclose on both properties, and because it was for a business loan the redemption period can be half of what a residential loan would be. Keep in mind your mortgage payment also includes principal, which is not tax deductible. In accounting parlance you are exchanging one asset, money, for another asset, equity in the property. The money goes to the lending institution and is not in your pocket to pay expenses and most of all taxes. There are several online mortgage calculators that can estimate your payments pretty well. Don't forget, you will have taxes on both properties and insurance as well. Though the insurance for a rental property is not the same as a home owners. It will be lower in cost, but with trade offs, ACV (actual cash value) for the roof, higher deductibles, increased premiums if the house sets empty, etc. Good luck on your goals. You are where I was several years ago.

Posted by: Realtyyoudefine on 2010-01-09, 07:55:53

You should have someone do your taxes for you. This is all deductible but your tax return has now become quite complicated. You will be itemizing and using 1040A, SCH A, SCH E and probably others depending on your financial situation and other income. Congratulations - you have made a decision to build wealth through real estate investing.

Posted by: Othniel on 2010-01-09, 08:34:29

Once your original house becomes an investment property all of your expenses except payments on principal can be claimed on the Schedule E. Make sure that you know exactly what your basis is when you convert the property from personal use to investment. The lender should issue you a 1098 showing how much you paid in interest during the tax year and that is what you claim as an expense. Your investment property will also be depreciated on a 27 1/ 2 year time line, utilities and repairs, real estate taxes, property insurance, HOA and so on are all legitimate expenses. You will also declare the rent you receive as income. This is a very brief explanation but I strongly suggest that you look into the tax implications by talking to someone who does taxes professionally and has experience with rentals. Your new house loan interest can also be claimed on Schedule A along with real estate taxes. For reporting the interest paid you will need to use the form sent by the lender so don't file your taxes until you have all that you need. The best to you in this world of real estate investment. By the way if you intend to be a landlord then I suggest a web site called: mrlandlord.com where landlords respond to different issues they face as a part of the business. There are also links for getting credit reports.

Posted by: Classy Granny on 2010-01-09, 09:46:58

I have rentals and if there is a mortgage the interest is tax deductable. You don't have to be living in it

Posted by: Dagger_SA on 2010-01-09, 19:43:37

It is pro-rated the first year based on how long you lived in it and when you first rented. It's not legally "rental " property until you actually have your first renters, but all the expenses leading up to that (advertising, cleaning, etc.) are all deductible. The taxes and interest paid on any qualifying mortgage are 100% deductible, but remember your rental price must be comparable to the market and you might only be able to take losses of $3,000 per year; however, if that applies to you, you'll be able to carry forward (like if you lose $6,000 in the first year, you write off 3 this year and 3 next year). Also keep track of exactly what date you put it on the market as that establishes the point of taking depreciation expense, and you'll need to have a sound basis for the value of the home on that date. Since you're getting a mortgage, you'll likely have a fresh appraisal done, so that will be your tax basis for the 27.5 year depreciation, or a $7K per year deduction for you to offset the income. TaxAct is a good software tool that will walk you through all the necessary depreciation, rental expenses, etc. I'm not advertising for them; I'm just a 10-year satisfied customer of theirs. Feel free to email me if you have any more questions on this. I'll be happy to assist.