Union City, NJ · Member since 2018 · 22 posts · 10 votes
Hi BP community!
I am currently living in a 1 bedroom condo. Mortgage is almost paid off. Husband and I plan to buy bigger place and rent out this 1 bedroom condo. I heard if there is montage on rental property, you offset with rent income and mortgage expense. If mortgage is paid off and rented out, rent income will be reported 100%? Is there other way to reduce tax on rental property?
@Soomin Kim - yes you can get a mortgage after you pay it off. You can also refinance your current mortgage which is almost paid off and get "cash out".
If you go the route of getting a mortgage, refinance while you still own it as a "owner occupied" loan has better terms than a "non owner occupied" or "investment property" loan.
Hi @Soomin Kim - You can still deduct direct expenses for the property like HOA dues, utilities you pay, taxes, depreciation, etc. You can also talk with your accountant about writing off other business related expenses like mileage, cell phone, printing, postage, etc..
You just won't have the mortgage interest to write off, but the upside is it means you have more cash flow. Not necessarily a bad thing.
One other thought is, depending on your goals, you could look at getting a mortgage on the condo then using the equity you pull out to leverage buying another investment property. But this could be counter to a completely debt free strategy you might have.
"Mortgage Expense" as you are referring to is broken up into 2 parts: principal and interest. Because the principal payments are actually just paying back money you borrowed, the IRS doesn't see this as an expense.
However, the "interest" portion of your mortgage is a deductible expense on a rental.
Other than mortgage interest, there are plenty of expenses to offset income. For instance:
1) HOA Fees
2) Insurance on the property
3) Mileage on trips to the property
4) Repairs
5) Property Taxes
6) Depreciation
As far as depreciation, I'd recommend getting someone with real estate experience to prepare your taxes the first year after you convert your property into a rental. The reason is because depreciation is based on the basis (value) of the property. Determining the basis, which may include improvements, among other items, will impact your depreciation expense for years, so it's important to get right the first time.
I'll let @Andrew Kerr talk you through the details of a cash out refinance.
As far as depreciation- on the day you convert to a rental, the depreciation is the LOWER of:
1) The Fair Market Value of the property (it's value on the market)
2) Your adjusted basis in the property (basically what you paid for it + improvements + original closing costs). This is the item I suggested getting a tax preparer for.
The increase in property value after you convert to a rental will not impact depreciation, as depreciation is determined by "basis" which doesn't fluctuate with property values.
@Soomin Kim - yes you can get a mortgage after you pay it off. You can also refinance your current mortgage which is almost paid off and get "cash out".
If you go the route of getting a mortgage, refinance while you still own it as a "owner occupied" loan has better terms than a "non owner occupied" or "investment property" loan.
I like the refinance while rates are low at primary residence or owner occupied rates as @Alan Rohrer and @Andrew Kerr are suggesting. Also having the rental mortgaged is good asset protection as well.
Would you rather a mortgaged property or a free and clear property? How do the lawyers think? They see equity or debt and then decide if they take the case.