I'm considering the net monthly cost of moving from a mortgaged home to a rental, and converting my current primary residence to a rental property.
(Note: the reason for renting instead of selling is that the mortgage is underwater, and if I can afford to continue to pay for it, I would like to.)
Right now I can deduct all the interest I pay on the mortgage, so its cost to me is essentially reduced by the amount of the tax bracket I am in.
If my understanding is correct, then rental income for my own property will count as ordinary income on my taxes, while the rent I would pay is not deductible in any way (ouch).
So, given some very rough example numbers, I might expect a cash flow change like this:
- $1500/month mortgage, of which $1000/month is interest
- 25% tax bracket
- Yearly mortgage total of $18000
- Less $3000 refunded for $12000 in deductible interest
- Net housing expenses of $15000 (two months free!)
After (Potential scenario)
- Rent out current house for $1400/month
- Pay for an apartment at $1200/month (net difference of $200 cheaper per month)
- Net yearly residence rental expenses $14400
- Net yearly rental income of $16800
- We'll say that I have $150/month of rental property maintenance that reduces my taxable rental income, in addition to the $1000/month of interest) - $13800/year in expenses, which makes $3000 in taxable rental income
- Net yearly housing costs of ($18000 mortgage - $16800 income) + $14400 + (25% * $3000) = $16350
Unless I'm missing something, I'm now living in a place that is $300 per month cheaper, but my housing costs are $1350 per year higher, because of the loss of taxable interest and new taxes on rental income.
For reference, this is not an investment calculation but rather an expense calculation to make sure that I understand correctly how to calculate my yearly living expenses if I decide to become a landlord in one location and a tenant in another.