Tax question - help!

M

MCunningham

Cathlete
A little background: my DH and I had bought a house in 2005 that was 70 miles from where we work because real estate prices in Maryland were absolutely insane. Fast forward to 2008-- DH has a chronic neck pain problem and the daily 140-mile round-trip commute was killing him.

We tried to sell our house, but of course the market had gone down the tubes and we couldn't budge on the price because we'd only owned it 3 years and had negative equity in it due to the bubble bursting. So we decided to rent it out in August 2008. However, our mortgage is $2800 per month and we could only rent it out for $1600 per month.

So, we are currently losing $1200 a month on our house. Up to this point, we've been hearing from a bunch of people that we know that we would be able to write of the $1200 monthly loss on our taxes.

However, I talked to a tax preparer today and he said that that isn't true, that the only thing you can write off is expenses for maintaining the place or advertising, and that we will have to report the $1600 a month as additional taxable income even though we are taking a 43% loss every month.

Now DH and I are really worried because we are "higher earners" but we get absolutely killed in taxes (both during the year and at tax time) because we don't have any deductions (no kids, no education expenses) except for our mortgage interest. So now we're worried that we're going to get seriously screwed on taxes because it's going to look like we have an additional $6,400 in income ($1600 x 4 months) to the IRS even though that doesn't even come CLOSE to what our mortgage is on that house.

Does this sound right to you guys? I admit, this is my first year doing this whole stupid rental thing, and I'm hating it more by the minute. :(

I'm just scared to death of owing a bunch of money because we are really in a position where we just cannot afford it...

Any input/information/advice?

MC
 
I am no tax specialist but I have several clients who are/were investors and at one point or another they had a negative cashflow between rental income and cost and I know their CPAs wrote it off.

My understanding was that you can't write off the loss as such but your mortgage interest payment (which normally is the majority of your payment anyway - your principal is really only for your "benefit" to pay down the balance of the mortgage and there is not deductible) is an expense that is reported on your schedule E. After all, the mortgage interest rate, taxes, insurance etc. are things that are necessary to even get those $ 1,600 and therefore an expense. It doesn't make any sense that the $ 1,600 would be taxed and your expenses of mortgage interest not taken into consideration.





As a landlord, here are the things you need to keep track of:
  • Purchase price of the house, condo, or apartment building you are renting out,
  • Accumulated depreciation, and current annual depreciation on your property,
  • Rental income,
  • Security deposits you received.
In addition, you will need to keep track of various expenses associated with your rental property, including:
  • Commissions or property management fees,
  • Advertising costs,
  • Cleaning, maintenance, and repair costs,
  • Homeowners insurance and HOA dues,
  • Real estate taxes and mortgage interest expenses,
  • Security deposits reimbursed to the tenant.
  • and various other expenses, such as utilities, landscaping, garbage, and so forth
I am not sure if there is a cap and I am not sure that you can write off more than your actual income of $ 1,600 but you can certainly offset so that you are not taxed on that income. Maybe it would be best to find a tax preparer/CPA who specializes in rental property income. The little bit that it costs more is probably worth it. Otherwise you can call the help line of the IRS directly.

HTH
 
Last edited:
IMO, you need to go to a CPA to get your taxes done (someone who has other clients with rental properties would be a plus). You can't write-off the difference between the rent and the payment but you can write off the interest on the mortgage as well as other expenses for upkeep on the house. There are specific code sections that deal with this.

At this point you will have to file an extention but I would definitely look for someone with some experience in this area.

Good luck!!

MCunningham said:
A little background: my DH and I had bought a house in 2005 that was 70 miles from where we work because real estate prices in Maryland were absolutely insane. Fast forward to 2008-- DH has a chronic neck pain problem and the daily 140-mile round-trip commute was killing him.

We tried to sell our house, but of course the market had gone down the tubes and we couldn't budge on the price because we'd only owned it 3 years and had negative equity in it due to the bubble bursting. So we decided to rent it out in August 2008. However, our mortgage is $2800 per month and we could only rent it out for $1600 per month.

So, we are currently losing $1200 a month on our house. Up to this point, we've been hearing from a bunch of people that we know that we would be able to write of the $1200 monthly loss on our taxes.

However, I talked to a tax preparer today and he said that that isn't true, that the only thing you can write off is expenses for maintaining the place or advertising, and that we will have to report the $1600 a month as additional taxable income even though we are taking a 43% loss every month.

Now DH and I are really worried because we are "higher earners" but we get absolutely killed in taxes (both during the year and at tax time) because we don't have any deductions (no kids, no education expenses) except for our mortgage interest. So now we're worried that we're going to get seriously screwed on taxes because it's going to look like we have an additional $6,400 in income ($1600 x 4 months) to the IRS even though that doesn't even come CLOSE to what our mortgage is on that house.

Does this sound right to you guys? I admit, this is my first year doing this whole stupid rental thing, and I'm hating it more by the minute. :(

I'm just scared to death of owing a bunch of money because we are really in a position where we just cannot afford it...

Any input/information/advice?

MC
Click to expand...
 
I have a rental property and unfortunately, your tax preparer is correct. IMO, though, having a rental property isn't that difficult tax-wise - it's pretty basic stuff so I don't know that I would go to a CPA if it costs a lot more than a tax preparer like H & R Block, or someone like that.
 
Ok, it all depends on your income if it over 250K, then you can not do it.

It will be passive loss. Also think about your other expenses, like for example depreciation on the house. It usually a huge chunk of expense.

My parents have rental property and they do deduct a loss every year around 6K every year. But they are not high income taxpayers.

Do calculate depreciation on your house. It will be quite a lot. You can probably at least recoup some of your losses thru taxes or break it even. That passive loss will be deductible when you sell your house.

The CPA that you talked to assume that all these expense are in preparation for sale and thereofore, you can only do maintenance. However, remember IRS does not know that you're planning to sell your house.

Elena
 
Worknprogress said:
I have a rental property and unfortunately, your tax preparer is correct. IMO, though, having a rental property isn't that difficult tax-wise - it's pretty basic stuff so I don't know that I would go to a CPA if it costs a lot more than a tax preparer like H & R Block, or someone like that.
Click to expand...

Unless you are using that home for personal use as well maybe you need to double-check with a CPA because the IRS states very clearly that interest payment is a deductible expense in rental property on Schedule E Form 1040

http://www.irs.gov/pub/irs-pdf/f1040se.pdf

According to the IRS website Instructions for 2008 Schedule E:




"You can deduct all of the following expenses for the rental part on Schedule E.
  • Mortgage interest.
  • Real estate taxes.
  • Casualty losses.
  • Other rental expenses not related to your use of the unit as a home, such as advertising expenses and rental agents' fees."
http://www.irs.gov/instructions/i1040se/ch02.html#d0e352

I think every situation is different though. It also depends on many factors like total income of the taxpayer, other expenditures, etc. I don't think there is a one-size fits all answer.

That being said, tax-preparers usually only have a few weeks of "training" whereas a CPA has a more extensive and in-depth education. In the first few years I had my taxes done by a tax preparer and when I went to the CPA he recalculated my taxes resulting in another refund of $ 5,000 over 2 years.
 
Last edited:
All,

Thanks for the information... I do keep track of the information listed with the exception of the "depreciation" of the house. How could I determine that? Is there a formula or something? Do you just take a stab in the dark?

MC
 
Most tax preparation softwares will calculate that for you. When you calculate depreciation you can only depreciate the structure portion, not the land.

Check your property tax bill if they break down between land and building. Some counties do, some don't.
 
Yes, we write-off the interest and depreciation, etc. We also report all repairs, advertising and all of that. I thought the OP was asking how she writes off the difference in what she receives for her rent every month and what her mortgage payment is.

My rental home was unoccupied for most of 2008 so we are in the same situation with paying more for the mortgage payment than we received in rental income. If there is a way to report that, please forward the info along to me since we weren't able to write that off according to my tax person and if we can - then I need to amend my taxes and find a different tax person.
 
Worknprogress said:
Yes, we write-off the interest and depreciation, etc. We also report all repairs, advertising and all of that. I thought the OP was asking how she writes off the difference in what she receives for her rent every month and what her mortgage payment is.

My rental home was unoccupied for most of 2008 so we are in the same situation with paying more for the mortgage payment than we received in rental income. If there is a way to report that, please forward the info along to me since we weren't able to write that off according to my tax person and if we can - then I need to amend my taxes and find a different tax person.
Click to expand...

We both may have read the OPs original post differently. My understanding was that her tax preparer had told her that she can only write off advertising expenses and maintenance of the rental property and additionally had to get the $ 6,400 in rental income taxed which I knew was incorrect.

As I said I am not a tax professional however I am in real estate and several of my clients are investors so I have a basic understanding of taxes as it pertains to rental income. The way I read the statement "When the rental is vacant, loss rent is not deductible" means that you can not deduct the loss.

In other words, if you monthly rent is $ 1,400 per month and your property is vacant for 3 months, your "lost income" would be 4,200. You cannot deduct/write off those $ 4,200 on your taxes, however, you can still deduct your expenses, like the actual interest payment.

On the other hand, if your rent is $ 1,400 but your mortgage payment is $ 2,000 you cannot tack on $ 600 every month as an expense, you can however still deduct your actual interest payment. I think there are caps as to how much you can deduct in loss every year, however, if you are a real estate professionals you can offset all your losses against you ordinary income

Publication 527 of the IRS states that "when a property is vacant only ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property are deductible". One of my client's CPA asked me if I didn't think paying interest was conserving and maintaining the property because the bank would repossess it in no time if I failed to make the payment. Can't maintain the property without paying the cost.

I think it really would be advisable to consult with a CPA to discuss the best way to do this. As I said there are no one-size-fits-all and taxes are complicated.

Maybe in the meantime this book is really helpful for landlords when it comes to their taxes.


http://www.nolo.com/product.cfm/Obj...4BBEB65E2810/sampleChapter/5/213/178/#summary
 
Last edited:
You must log in or register to reply here.

Our Newsletter

Get awesome content delivered straight to your inbox.

Top