Tax Deduction for Rental Property Mortgage Interest
Pittston, PA · Member since 2018 · 8 posts · 4 votes
My accountant told me that b/c my income is over 150K, the interest paid on my rental property mortgages are not deductible. I would only be able to claim these ductions if my income falls below 150K or when I sell the properties. Is this accurate?
I also have a HELOC on one of my rental properties. I took a draw to use as a down payment for another rental property. I was also to that the interest paid on the HELOC was not deductible either.
The high income is from my W2 job. I understand my passive losses cant be used to reduce my active tax liability. BUT I want to think that the rental property mortgage interest would be able to offset the rental properties taxable incomes and even be "banked" if all of my total losses exceeded the 25K per year loss limits.
My accountant told me that b/c my income is over 150K, the interest paid on my rental property mortgages are not deductible. I would only be able to claim these ductions if my income falls below 150K or when I sell the properties. Is this accurate?
I also have a HELOC on one of my rental properties. I took a draw to use as a down payment for another rental property. I was also to that the interest paid on the HELOC was not deductible either.
The high income is from my W2 job. I understand my passive losses cant be used to reduce my active tax liability. BUT I want to think that the rental property mortgage interest would be able to offset the rental properties taxable incomes and even be "banked" if all of my total losses exceeded the 25K per year loss limits.
There's a bit of misunderstanding going on here.
First, with regard to deducting rental items when your W2 income is over $150,000. This is called the Passive Activity Loss Limitation and it works like this:
You prepare a schedule E and you report ALL of your rental income and expenses - including interest (not sure why that's carved out separately in your question). If the end result is a profit, then your report and pay tax on that. If the end result is a loss, then you do not deduct that loss this year. Instead, you roll it forward to the next year and every year until one of three things happens.
1. Your income dips below $150,000. At that point, some or all of your accumulated losses may be deductible in that year. Whatever is not deductible continues to roll forward.
2. You have rental profits in a future year. In that year, you deduct your prior year losses against those future year profits. In this way, your current year losses are creating future tax free profits (pretty cool)
3. You sell the property that's generating the loss. When that happens, all of the prior year accumulated losses are released and you can deduct them without limit.
As far as the HELOC goes, ask your accountant to research "interest tracing rules". These rules allow you to "trace" interest to the usage of the funds. In this case, the interest is deductible to the extent you invested the funds in another rental. Your accountant seems to be confused about the interest rules associated with a primary residence, so ask them to do a little additional reading. However, the fact that they didn't automatically know this tells me you are NOT with a real estate focused CPA and you should maybe consider switching.
My accountant told me that b/c my income is over 150K, the interest paid on my rental property mortgages are not deductible. I would only be able to claim these ductions if my income falls below 150K or when I sell the properties. Is this accurate?
I also have a HELOC on one of my rental properties. I took a draw to use as a down payment for another rental property. I was also to that the interest paid on the HELOC was not deductible either.
The high income is from my W2 job. I understand my passive losses cant be used to reduce my active tax liability. BUT I want to think that the rental property mortgage interest would be able to offset the rental properties taxable incomes and even be "banked" if all of my total losses exceeded the 25K per year loss limits.
There's a bit of misunderstanding going on here.
First, with regard to deducting rental items when your W2 income is over $150,000. This is called the Passive Activity Loss Limitation and it works like this:
You prepare a schedule E and you report ALL of your rental income and expenses - including interest (not sure why that's carved out separately in your question). If the end result is a profit, then your report and pay tax on that. If the end result is a loss, then you do not deduct that loss this year. Instead, you roll it forward to the next year and every year until one of three things happens.
1. Your income dips below $150,000. At that point, some or all of your accumulated losses may be deductible in that year. Whatever is not deductible continues to roll forward.
2. You have rental profits in a future year. In that year, you deduct your prior year losses against those future year profits. In this way, your current year losses are creating future tax free profits (pretty cool)
3. You sell the property that's generating the loss. When that happens, all of the prior year accumulated losses are released and you can deduct them without limit.
As far as the HELOC goes, ask your accountant to research "interest tracing rules". These rules allow you to "trace" interest to the usage of the funds. In this case, the interest is deductible to the extent you invested the funds in another rental. Your accountant seems to be confused about the interest rules associated with a primary residence, so ask them to do a little additional reading. However, the fact that they didn't automatically know this tells me you are NOT with a real estate focused CPA and you should maybe consider switching.
@Linda Weygant, thanks so much for the clarification. That make more sense than what I was told my by cpa. Definitely the market for someone who is more experienced with real estate investors.
My accountant told me that b/c my income is over 150K, the interest paid on my rental property mortgages are not deductible. I would only be able to claim these ductions if my income falls below 150K or when I sell the properties. Is this accurate?
I also have a HELOC on one of my rental properties. I took a draw to use as a down payment for another rental property. I was also to that the interest paid on the HELOC was not deductible either.
The high income is from my W2 job. I understand my passive losses cant be used to reduce my active tax liability. BUT I want to think that the rental property mortgage interest would be able to offset the rental properties taxable incomes and even be "banked" if all of my total losses exceeded the 25K per year loss limits.
There's a bit of misunderstanding going on here.
First, with regard to deducting rental items when your W2 income is over $150,000. This is called the Passive Activity Loss Limitation and it works like this:
You prepare a schedule E and you report ALL of your rental income and expenses - including interest (not sure why that's carved out separately in your question). If the end result is a profit, then your report and pay tax on that. If the end result is a loss, then you do not deduct that loss this year. Instead, you roll it forward to the next year and every year until one of three things happens.
1. Your income dips below $150,000. At that point, some or all of your accumulated losses may be deductible in that year. Whatever is not deductible continues to roll forward.
2. You have rental profits in a future year. In that year, you deduct your prior year losses against those future year profits. In this way, your current year losses are creating future tax free profits (pretty cool)
3. You sell the property that's generating the loss. When that happens, all of the prior year accumulated losses are released and you can deduct them without limit.
As far as the HELOC goes, ask your accountant to research "interest tracing rules". These rules allow you to "trace" interest to the usage of the funds. In this case, the interest is deductible to the extent you invested the funds in another rental. Your accountant seems to be confused about the interest rules associated with a primary residence, so ask them to do a little additional reading. However, the fact that they didn't automatically know this tells me you are NOT with a real estate focused CPA and you should maybe consider switching.
Is it W2 income over 150K or Adjusted Gross Income(not counting rental income) over 150k?
@Keith Hoffman II I think there was just a misunderstanding between you and your cpa.
As @Linda Weygant explained very well…..All of your expenses (including interest and depreciation) are deductible against your Rental Income. It’s just that if this calculation results in a loss, you can’t deduct that Loss from your W-2 income, since you make more than $150k.