Rental Room House Hacking Tax Benefits

Property Manager · Washington Twp, NJ · Member since 2017 · 152 posts · 169 votes

Hey guys I'm new to the real estate world and I have a question on Tax deductions when it comes to purchasing a single family home and renting out the rooms to tenets in the Baltimore area.

I was looking into personally purchasing a 3 bed/2 bath house in Hampden, Baltimore using seller financing, living in one room and renting the other two out. If I purchase the house using seller financing can I:

A) Deduct the mortgage payment off my taxes?

B) Deduct appreciation off my taxes for my house?

C) Deduct expenses like repairs & cap-ex off my taxes?

Looking forward to the help!

-Mike Bonadies

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Ron Trinh
Investor · San Diego, CA · Member since 2013 · 52 posts · 44 votes
9y
Hi Mike,
Here are some thoughts to get you started on the below for federal purposes. I am not familiar with NJ state tax law, so will not comment there.
A) The mortgage interest portion of the mortgage payment should be deductible if you itemize on your personal return. You would have to include the seller's name, legal ID number (usually SSN), and address on Schedule A since you would be seller financing as opposed to bank financing (where you would receive a Form 1098). The principal portion would not be deductible.
B) I am not sure if I understand this question correctly, but appreciation does not reduce taxes. Appreciation generally gets captured on the tax return when you sell the property and the price sold was more than what you paid (basis) resulting in a gain (which is taxable income, generally). There are rules regarding whether you can exclude this gain or not, so I would consult your tax CPA regarding exit strategies if you plan on selling at some point.
C) Expenses may be deductible when those cash payments are actually made for repairs, etc. I would be careful though if your expenses from your rental are more than rents, resulting in a loss. Since rental activities are considered passive activities for tax purposes, there are passive activity loss rules that may limit the amount of losses you can take. There is also a real estate professional election you may be able to make if you meet certain conditions. Electing the real estate professional designation removes the passive activity loss limitation, assuming you can substantiate the election (records of time spent, etc.). Again, consult your tax professional for your info. Looking up the new tangible property regulations may also help you consider which items can be deducted and which cannot.
Hope that gave you some areas you can start your research.
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Daniel HymanBusiness Member
CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
9y
@Mike Bonadies Welcome to BP and the world of real estate investing! Great strategy for building wealth!
You can deduct all eligible rental expenses (including mortgage interest) using a proportionate ratio either by rooms or by square feet. So, if mortgage interest is $3K, then $2K can be deducted on Schedule E, and $1K on schedule A. Maintenance costs for the tenants portion are deductible, but not for the for the owner occupied portion. And the renter portion of depreciation (not appreciation) is deductible as well.
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Mike Bonadies
OP
Property Manager · Washington Twp, NJ · Member since 2017 · 152 posts · 169 votes
9y
@Daniel Hyman & @Ron Trinh - Thanks a bunch for the comments. I had a typo and I meant to say depreciation not appreciation but it looks like you knew what I meant Dan! This gives me a basis to work off of.
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