Rental Property As Primary Residence
Hi,
I am looking for some advice on how to get started in the real estate market. I currently rent an apartment , and have about $48K in the bank for a down payment on a home. I can not afford a home where I work, thats why I rent, so I have looked at communities about an hour away to buy a single family residence, 2 bedroom 1 bath and rent it. I have found that I can get a mortgage of about $1000 a month, and collect rent of about $1300 a month. I am not sure what the tax implications are if this is an income property, but I do not own another home. Can I claim is as my primary? If I don't, will I be taxed alot?
Erinu,
Your primary residence is the apartment you are renting. Where you actually live most of the time is your primary residence.
Rental income, your ownership and operating expenses, as well as a depreciation deduction are all reported on Schedule E when you file your annual tax return.
Once you offset your rental income with your mortgage interest, property taxes, insurance premium, repair and maintenance costs, legal fees, leasing fees, homeowner association fees, management fees (if any), and depreciation expense, you may find that you have a tax loss on your investment property.
Net passive losses can, with certain restrictions, be used to offset your other ordinary income and reduce your overall tax liability.
If you are living in an apartment, you cannot buy a rental property as your primary. This is a fraud. Where you live is your primary. I would buy a duplex with one unit already rented, and live in another unit. You may not have to come up with any down payment, if you get FNMA 100% program or any other 100% program.
I think the duplex idea may work great for you. Is the price of these reasonable in the area you currently rent?
No, unfortunately I can not even afford a condo near where I work. Thats why I am renting. But I want to be building equity somewhere.
If I can get a rent for a few hundred dollars higher than my mortgage, and I know that the propoerty will appreciate, can I lose on this?
I am not sure how all the taxes and stuff works. I thought in California you could only write off rental expenses if you owned more than five units?
I am scared about doing this, but I can't find a better place to put my money!
You cannot offset your rental expenses against the rental income.
Your primary residence is your current apt.
and your rental property is a business income, so you cannot offset the two.
Thank you all for the info, I started another thread about loans. I appreciate all of the info, I am very new at this, and trying to make sure this a good investment for me! I appreciate all the input, any additional advice is appreciated!
Quote:You cannot offset your rental expenses against the rental income. Your primary residence is your current apt.
and your rental property is a business income, so you cannot offset the two.
anuraj,
In our discussion, rental income from an investment rental property IS offset by the expenses of owning and operating an investment rental property, to include depreciation. Both are reported on Schedule E.
You are correct that the rent you pay for your primary residence is not deductible. In this instance, the rent you pay for your primary residence is a non-deductible personal housing expense -- not a "rental" expense as we frequently use the term when talking about income taxes.
In the future, to be absolutely clear, I will refer to the costs of ownership and operation of an investment rental property as "operating expenses".
Ok, sorry I am very new at all this. I understand I can't write off my rent for the apartment I live in, but I can write off the expenses associated with the rental I am buying, right? Like advertising costs, or any maintenance? What about the mortgage interest on my rental, can I write that off as well?
Rental income, your ownership and operating expenses, as well as a depreciation deduction for your investment rental property are all reported on Schedule E when you file your annual tax return.
Once you offset your rental income with your mortgage interest, property taxes, insurance premium, repair and maintenance costs, legal fees, leasing fees (to include advertising costs), homeowner association fees, management fees (if any), and depreciation expense, you may find that you have a tax loss on your investment property.
Again, please forgive my ignorance. I have hear "tax loss" quite a few times. What does that mean?
Do I try to have deductions equal to or greater than the income I receive from the property? Is that what makes a tax loss?
What Dave T is saying is that you can show negative bottom line in schedule E, if your expenses including depreciation exceed your rental income. The loss (up to $25,000) can be deducted from your ordinary income (like from your employment), that will reduce your taxable income. As a result, you will pay less income tax.
Ohhhhhhh......thanks. I talked to my tax attorney yesterday and he explained the same thing to me.
So I have another stupid question, I am having a hard time quantifying the risk here. If I can more than cover the mortgage with the rent I get, and have the depreciation deduction and mainteance off set that income, how do I lose here?
I have tried to identify all the "worst case" scenarios, but so far, I have detemrined that if for some reason I can't find a renter, I have to move into the property myself, or sell it and pay any capital gain tax. So what am I missing here, is there a big risk I m overlooking?
Quote:So I have another stupid question, I am having a hard time quantifying the risk here. If I can more than cover the mortgage with the rent I get, and have the depreciation deduction and mainteance off set that income, how do I lose here? Erinu,
Since your question is not an income tax question, I suggest that it is outside the scope of this forum.