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  1. #1
    Join Date
    Dec 2009
    Posts
    1

    Question Renting Primary Residence

    I have read posts about renting primary residence tax laws but still not comfortable as I feel that laws are not fair... Renting primary residence brings revenue but it also means that I have to live somewhere and pay rent that I would not pay if I did not rent out my house.

    When I lived in my house I benefit from deduction of mortgage interest and property tax.

    Now I rented out this property and rented another house to live in another state (had to move as I found a new job). I am getting some money in from my old home rent and spend them all on my new rental place. So, whatever I am earning from rental is offset by my new expense - rent that I pay to live. In such transaction I should not incur any losses to be fair.
    However, it feels like I am going to loose money since I will not be able to deduct interest and property tax.

    Am I missing something or it is just life that is not fair in general?

  2. #2
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: Renting Primary Residence

    Quote Quoting RomanB
    View Post
    I have read posts about renting primary residence tax laws but still not comfortable as I feel that laws are not fair... Renting primary residence brings revenue but it also means that I have to live somewhere and pay rent that I would not pay if I did not rent out my house.

    When I lived in my house I benefit from deduction of mortgage interest and property tax.

    Now I rented out this property and rented another house to live in another state (had to move as I found a new job). I am getting some money in from my old home rent and spend them all on my new rental place. So, whatever I am earning from rental is offset by my new expense - rent that I pay to live. In such transaction I should not incur any losses to be fair.
    However, it feels like I am going to loose money since I will not be able to deduct interest and property tax.

    Am I missing something or it is just life that is not fair in general?
    You are going to have to claim the rental income that you receive from your prior home on Schedule E, however you will also be able to deduct expenses connected with the rental on Schedule E as well, which includes mortgage interest, property taxes and depreciation.

  3. #3
    Join Date
    Mar 2008
    Posts
    1,995

    Default Re: Renting Primary Residence

    Quote Quoting RomanB
    View Post
    I have read posts about renting primary residence tax laws but still not comfortable as I feel that laws are not fair... Renting primary residence brings revenue but it also means that I have to live somewhere and pay rent that I would not pay if I did not rent out my house.

    When I lived in my house I benefit from deduction of mortgage interest and property tax.

    Now I rented out this property and rented another house to live in another state (had to move as I found a new job). I am getting some money in from my old home rent and spend them all on my new rental place. So, whatever I am earning from rental is offset by my new expense - rent that I pay to live. In such transaction I should not incur any losses to be fair.
    However, it feels like I am going to loose money since I will not be able to deduct interest and property tax.

    Am I missing something or it is just life that is not fair in general?
    If you are renting out your former home, you will be deducting the mortgage interest, property taxes, insurance, repair, maintenance expenses, as well as managment fees if it is professionally managed. The rental income, and expenses go onto the Schedule E of your Federal income taxes. In addition, you are entitled to take depreciation, which you cannot do as a homeowner.

    Depending on how much rent, and how large the deductions are, but with depreciation, it'll be larger than it was when you were a homeowner. In fact, as a homeowner, you cannot deduct repairs, which you can do as a landlord.

    However, taxation issues are more complicated than a home, such as the "passive loss limitation rules", and eventually paying capital gains when you sell, if you rent it out over a number of years.

    Overall, I think you're doing OK, if not even better, if you collect at least enough rent to cover the expenses. In brief, your ability to deduct net losses depends on whether you make over $100,000 a year, at which point, it's limited, with net losses against active income (wages) not allowed over $150,000/year. But, you don't lose it, it goes into suspense, when you can again deduct when your income goes below $100,000, or sell the place.

    And yes, your rent on the new place is not deductable. It may sound unfair to you, but US laws were made to encourage home ownership, so mortgage deductions are promoted. There are many countries in the world, I beleive Canada included, where home mortgage deductions are not allowed, and in fact, in many places, people have to put 50% down or more on a house, or even pay 100% cash on a house. My cousins in Canada complain about how UNFAIR it is that they cannot deduct interest!!

    But you have to look at the overall priorities of society, and it would seem foolish that you either have to make renters the same as with homeowners, i.e, not allow mortgage deductions, make everyone miserable, or let renters deduct rent as an expense, resulting in NO incentive to promote home ownership. But with the huge budget deficits, do you think they'll go for rent deductions, for the few cases where people relocate??

    Of course, the answer in your case, if it is so unfair, just sell the home tax free, as for married couples, capital gains of up to $500,000 for homes are exempt from capital gains taxes.

  4. #4
    Join Date
    Jul 2007
    Location
    Florida
    Posts
    2,344

    Default Re: Renting Primary Residence

    Schedule E and depreciation may be beyond what you can handle yourself. See a professional to prepare your tax returns.

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