Can You Write Off the Difference Between the Rent Collected & Mortgage Paid?
When you rent out your home, whether it is a short-term or long-term rental, you will have rental income and house expenses to report. How you report these on your income taxes depends on the purpose of the rental and whether you are planning on renting it out to make taxable profit.
Intentions
The purpose of any investment activity, including renting, is to make a profit. There may be years when you have losses on rental property due to events such as major repairs or other unexpected expenses, but in general, you should be trying to make money by renting. If your intention is to rent out your house just to recoup some of the mortgage payments, you may be restricted in how much loss you can claim for tax purposes. If the arrangement guarantees a loss, it is not considered either an investment or a business and you will be allowed to claim only those expenses against the rental income to bring it down to zero.
Mortgage Payments
The difference between the rent you receive and your total mortgage payment is irrelevant as not all of the mortgage payment is deductible for tax purposes. The portion that represents mortgage interest, insurance and property taxes can be deducted but the principal portion is considered capital and you will recover that part of the payment when you sell your home. When figuring your net rental income or loss, exclude that portion of the payment from your expenses.
Rental Income and Expenses
Other than mortgage interest, property taxes and house insurance, you can deduct other house expenses from the rental income you receive. Repairs and maintenance, utilities and legal and accounting fees related to the rental are all deductible. You can also depreciate your home and take a small expense for a portion of it each year. However, if the rental income received does not cover the known expenses, such as mortgage interest and taxes, you will not be allowed to create a rental loss to use against other sources of income. You can only bring your taxable rental income down to zero.
Renting a Portion of Your Home
If you still live in a portion of your home and rent out a portion, you must divide your house expenses between the two areas. Only the portion that relates to the rental can be deducted. For example, if your home is 2,000 square feet and you rent out 800 square feet, only 40 percent of the whole house costs can be deducted. You can deduct 100 percent of any repairs and maintenance you have done that only affects the rental portion and zero percent of any done to your portion of the house.
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