What Can I Deduct On My Rental If I Make Over 150K

I need a tax advise. I live in california,married, with joint income over 150K. We bought a rental last year. It only rented for 3-months of the year. This year it will be rented for entire 12-months. The rent income does not cover the monthly payment on the rental. Because we make over 150K, what deductions/limitiations we are entitled to?? Can I still deduct the entire mortgage, property taxes, association fees, etc, ??? For example, if I get a rental income of 15K/year and the rental expenses are 20K/year, will we be taxed on the 5K extra because we make over 150K?? thank you for your reply.
Mike,

Mike,

You get to "deduct" all the normal costs of rental property ownership and operation against your rental income. Does not matter how much other income you have.

You are allowed to claim rental expenses for advertising, hazard insurance, real property taxes, personal property taxes, mortgage interest (not principal), HOA fees, leasing fees, legal fees, utilities you paid while the property was vacant, repairs made after the property was put in service, preventive maintenance, PMI, and most anything else directly related to the ownership of the property or your rental activity -- even the cost of postage when you send your tenant a certified letter concerning his lease renewal.

You can not deduct rehab costs or repairs needed to get the property ready to rent. Those costs are capitalized and recovered through depreciation.

You are also allowed to take a depreciation expense starting from the month you first placed the property in service as a rental. The IRS has a table in their publication on Depreciation that tells you how to prorate the annual depreciation when you put the property into service during the year.

According to your post, you had a rental loss for the year when you add up all your expenses and net them against your rental income. This is called a net passive loss.

When your rental activity results in a net passive loss, it is not forfeited due to your high income. Because you make over $150K in other ordinary income, you are not allowed to use your passive loss to offset your other "active" income. Instead, you carry the net passive loss forward to the next tax year when it once again is expensed against rental income.

You are not taxed on rental losses. Losses are not income. If you have rental income of $15K and rental expenses of $20K, you have a net rental loss of $5K. In this example, the $5K is carried forward to the next tax year.

If you sell this property, your unused passive losses can be used to offfset your sale profits and reduce your taxable capital gain regardless of your other income.



[ Edited by NewKidInTown3 on Date 05/08/2008 ]

Thank you for your reply Newkid. Very helpful info, you're correct, I meant the 5K as a loss.
q1: Although I still have a question regarding the time when the rental was sitting idle (last year), after purchase, the rental sat idle for a good 9-months, I only collected rent for 3-months, If I declare that the first 9-months were for personal use (second home), can I get a deduction on the mortgage for those months??
q2: For every year that I carry a "deferred" loss, and let say I sell the rental after 5-10 years, how do I report these losses to the IRS, Do I have to keep a record for each year? Do I have to file some form with the IRS for these losses which will be deducted in the future when I sell, Thank you for your reply,
Mike,

q1: Although I still have a question regarding the time when the rental was sitting idle (last year), after purchase, the rental sat idle for a good 9-months, I only collected rent for 3-months, If I declare that the first 9-months were for personal use (second home), can I get a deduction on the mortgage for those months??

the question to answer is how were you using the property in that first nine months. Was is being advertised for rent, or, did you reserve it for your personal use?

If the property was advertised for rent, then the property was in service as a rental. Does not matter that it was not tenant occupied and did not generate rent during that first nine months. Claim

If you reserved the property for your personal use in that first nine months, the yes you can deduct 75% of the mortgage interest and 75% of the property taxes for your "second" home on Schedule A (1040). Deduct the rest of the mortgage interest and property taxes on Schedule E (1040).

From the way your question is worded, I suspect tht the property was in service as a rental for most of the tax year. You are entitled to claim the full year of rental property expenses even though you only had income for three months. All your rental income and expenss are reported on Schedule E (1040)


q2: For every year that I carry a "deferred" loss, and let say I sell the rental after 5-10 years, how do I report these losses to the IRS, Do I have to keep a record for each year? Do I have to file some form with the IRS for these losses which will be deducted in the future when I sell,

The technical term is "suspended" loss. Your suspended loss will be calculated and reported on Schedule E each tax year. the suspended loss carried forward from 2007 is reported on Schedule E on your 2008 tax return. If you still have a suspended loss in 2008, it is carried forward and reported on your 2009 Schedule E. Your tax returns document your suspended loss.

When you sell the rental property, you will complete Form 4797. There is a line item on that form where you enter your suspended loss.