Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

My wife and I file returns jointly. For the year 2013, we moved into a new home. However, since the market was not great we did not sell our old home. We rented it out for around 4 months. So for 2013 we have been paying mortgage on the old property and the new property as well.

Can we deduct mortgage interest on two properties in the same tax year?

share|improve this question
    
It's empty now? Are you trying to get a tenant? –  JoeTaxpayer Mar 23 at 23:13
    
It has a tenant in it now but initially when we moved to the new house it id not have a tenant in it –  Josh Mar 23 at 23:35

2 Answers 2

up vote 4 down vote accepted

You most definitely can.

However, not in the same way.

For the rental property - you deduct the mortgage interest from the rental income on schedule E.

For the primary residence - you deduct the mortgage interest as an itemized deduction on schedule A.

If your primary residence became a rental property (or the other way around) - you deduct the interest you paid on it as a primary residence on schedule A, and the interest you paid on it when it was a rental - on schedule E. In this case there are more rules on expenses and deductions to follow, not just the interest expense.

share|improve this answer
    
hmm ok. I'll be using turbo tax so hopefully they'll take care of which Schedule it should go on. You mentioned "you deduct the mortgage interest from the rental income". However, in my case, I just rented the property for 4 months so my mortgage income is less than the mortgage interest I paid. –  Josh Mar 23 at 22:35
    
@Josh then you may very well be out of luck. Since it was primarily used for personal use (8 out of 12 months), you can only deduct up to the income received. –  littleadv Mar 23 at 22:42
1  
@littleadv - are you sure of this? You are suggesting that this oddity impacts anyone converting a home in the second half of year? –  JoeTaxpayer Mar 24 at 13:44
    
@Joe I might have over-simplified it, but yes - that's the general idea. See here: irs.gov/publications/p527/… –  littleadv Mar 24 at 21:16
1  
+1 I need to say you are right. But more than that, I'm dumbfounded that I've never run into this before. I'd wager 9 of ten people that rent their house post-June miss this, if it applies. –  JoeTaxpayer Mar 24 at 22:11

You need to read IRS Pub 527 Residential Rental Property You need to layout the timeline regarding the activities on the property. You will need to know not when you rented the house, but when it was placed in service, which is the date that it was ready to be occupied. Your interest before this date is related to the property as a personal home.

For example regarding the interest, taxes and insurance:

  • January to move out date: Interest,taxes on schedule A. Insurance not deductible.
  • Move out date until placed in service date: Interest, taxes on schedule A. Insurance not deductible.
  • Placed in service date until the end of the year: Interest, taxes, insurance all deductible on schedule E.

You will also have to determine the deprecation on the property during the period the property is in service.

Regarding personal use of the property. The important thing is the date the property was placed in service. Let the tax software determine what is the maximum amount you can deduct, fill in all the allowed expenses and all your rental income and see where you are. Expenses related to trying to sell the property and prepare it for rent have to be determined carefully to make sure they are allocated correctly.

In pub 527 Chapter 4 will be very important for your situation:

Property Changed to Rental Use

If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use.You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040).

Example. Your tax year is the calendar year. You moved from your home in May and started renting it out on June 1. You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities.When figuring depreciation, treat the property as placed in service on June 1.

share|improve this answer
1  
Great explanation - the OP should note, depreciation is not optional. It must be taken when the property is put into service as a rental. –  JoeTaxpayer Mar 24 at 13:13
    
Well, must is a bit harsh... But whether you deducted it or not will not matter for the recapture when you dispose of the property, so not taking it will just mean paying more in taxes you don't have to... Generally, as we've discussed before, any deduction is not optional, but in case of depreciation - not only that its not optional, but even if you fail to take it - it is still being recaptured. –  littleadv Mar 24 at 23:14

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.