Rental Property Benefits
With the 2010 tax season coming right around the corner, it's important for you to learn how to minimize your liability and maximize your return. If you purchased a rental property, or converted a property to a rental property during the 2010 year, you will have additional forms to fill out. Besides having additional income, there are several other benefits associated with owning and managing rental property. One of those benefits is in respect to your taxes. One question that homeowners may be asking, is can you claim mortgage interest on rental property? The answer is complex, but undeniably yes. Let's look at some of the benefits of rental properties with respect to taxes.
If you are one of the lucky few who are able to turn a profit on a rental property from the beginning of your holdings then you may find that on your taxes, you will still incur a net loss. Why is this? The reason is that the property itself is a depreciable item and depreciation is considered an expense in regard to rental properties. Depreciation as an expense will work to offset the income you receive from your property. The IRS yearly publishes Publication 527 which details residential rental property taxes, to find the 2009 publication, click here.
To try to explain how you could incur an overall loss, but still have cash in the bank at the end of the year, let's look at an example. Let's say that you earn rent of $10,000 for the entire year. Also assume that mortgage payments total $6,000 and maintenance payments come to a total of $500. Altogether, you have offset your rental income by $6,500 leaving you with a profit of $3,500. However after taking into consideration the depreciation of your home over the life of the home, you may find you have $4,000 of depreciation to claim, leaving you with a net loss of $500 ($3,500 - $4,000). So not only do you end up with money in your pocket, but the IRS says your activities on the rental property left you with $500 less of income last year. Counterintuitive, but you'll take it! That's $500 less that you have to pay taxes on.
Now, how do you claim all of these expenses and overall losses? Those familiar with itemizing deductions will remember that mortgage interest can be claimed on a Schedule A. However, whether or not you are able to, or will even want to, claim your rental property mortgage interest on a Schedule A will depend on a lot of different factors. So, let's first take a look at what you can claim on your Schedule A.