Mortgage payment vs. rental income for taxes

6 Replies

I am currently about to rent my home that is under a FHA mortgage. I have lived in the home for over a year as my primary residence. My monthly note is $1,238.00 a month and It will rent for $1,675 a month. I only placed 3.5% down 13 months ago when I purchased the home. My question is how will my taxes work. I understand I can write off expenses and interest among other things. I want to know if my taxes will show $20,100 in extra income even though i'm only actually profiting $5,244 a year off the rent due to my current mortgage. Any and all advice is apreciated!! I am not looking to make a huge profit off of this rental I just want to free up some money. I just want to make sure that the taxes do not wash everything I'm trying to do.

@Jordan Hunter if you have this structured under your personal name (and not a business entity) you will claim this property under "Schedule E" of your 1040's.  If you review that schedule you will notice that you will show the full income that you earned and then you will deduct all the expenses below that.  After all the expenses are deducted that is what will leave you with your taxable income.  Hope this helps!

@Jordan Hunter No, your taxes will not show $20k of extra income. :) As a landlord, you can reduce your income from the rental property by number of things, including mortgage interest, property taxes, depreciation, and more... 

In many cases, the depreciation deduction wipes out any income remaining after deductible expenses related to the rental property. 

Hopefully this helps, but let me know if you have any questions. 

You can also get other deductions. Taxes, insurance, maintenance, depreciation, mileage...there are lots of them. Document everything. May I suggest quickbooks as a great way to start your book keeping. 

Jordan,

Did you check if you can rent out a house with a FHA mortgage, as I read that FHA loan is only for owner occupied?

I will check into that first before moving forward to avoid potential issue, as FHA can request you fully pay off your loan if it is not owner occupied.

After taking all the expenses and depreciation, you will have a loss, so there is no need to pay tax.

Good luck,

John

If your expense estimate is correct, you will end up reporting $5400 net income + principal pay down, minus depreciation.  You don't report your entire mortgage payment as an expense, just the interest (and TI if that's included).  

If you have a large gain in value of the house, you might consider staying in it as your primary until the 2 year mark, then selling before renting it out for 36 more months.  If it was your primary for 2 of the previous 5 years, the price gain should be tax-free at time of sale @Jordan Hunter .

Originally posted by @Jordan Hunter :

 i'm only actually profiting $5,244 a year off the rent due to my current mortgage. 

Things are better than you realize. 

You are looking at your situation in a logical manner: I collect X for rent. I pay Y on my mortgage. My income is X-Y.

The IRS does not look at your situation in a manner that is as easy to understand. It's not difficult to understand the IRS way, but it takes a little bit of study. The IRS sees you as having a business. You have revenue from that business - rent. You also have expenses for that business - taxes, insurance, interest, maintenance, repairs, advertising, travel, depreciation, etc.

Your taxable income from your business will be the revenue (rent) minus all your expenses.

It is common for new landlords to have no taxable income their first few years in their new business. You may find yourself in that category. Find a tax pro that can set you up correctly in your first year. Calculating depreciation expense is an unnatural act. It's worth it to have a pro do it for you.

Best of Luck on your real estate investing!

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