Rental Or Residence

I purchased a home that was originally intended as my primary residence last year. However, due to the rapid market downturn, I was not able to sell my previous home and ended up with both. I will end up having to rent out the new home to meet my payments, which I'm already struggling to do. The house itself is upside down now. My question is, if I report as a rental on my return, and then end up losing the house, will it hurt me that I reported it as rental, if I am sent a 1099 or deficiency judgement by the lender? The tax benefits right now would make it better to rent it out and report as rental, but in the event I have to foreclose, I wouldn't be protected by the Debt Relief Act--is that correct?

How much can you get in rent for your current house?

If you did not have the mortgage payment for your current house, would the new house be affordable? If so, then just rent out the current house for a positive cash flow and move into the new house.

Another thing to consider is that you can still rent out your current house for up to three years and still get the capital gains exclusion on the sale. Sometimes it is a lot easier to sell your house to your tenant than it is to let it sit vacant while you are searching for a buyer.

You have income, and you have assets. You say that you are keeping up with the mortgage payments although it is a struggle. I doubt that the Debt Relief Act will give you much relief if you let the new house go to foreclosure.

A foreclosure on your credit report will stay with you for seven years. Don't worry about how a rental will look on your tax return. Instead worry about how you will avoid trashing your credit for seven years if you go into foreclosure.