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I have a questions regarding mortgage interest deductions.

I have two rental properties in California. For property A, the rental income is $5000 more than total expenses plus mortgage interest, and for property B, the rental income is $5000 less than the total expenses plus mortgage interest for that property. Question: Can I use mortgage interest I paid for property B to deduct rental income I got from property A?

Thanks

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  • 7
    Tax questions need a jurisdiction. Where in the world are you?
    – Vicky
    Commented Mar 25, 2022 at 8:57
  • 3
    And where are the properties, if that’s different.
    – Mike Scott
    Commented Mar 25, 2022 at 9:27
  • yes. it is united states as the dollar sign suggested
    – Manto
    Commented Mar 31, 2022 at 18:04
  • 2
    Stares in Canadian (or Australian, or New Zealandian, or Singaporean, or ...)
    – Kate Gregory
    Commented Mar 31, 2022 at 21:12

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I'll assume that you are talking about the United States, and I'll assume that both rental activities are "passive" activities.

There is a rule that passive activity losses can only be deducted against passive activity gains. So if you have a net loss over all of your passive activities, you cannot deduct that loss against your nonpassive income; instead, you would have to carry that loss forward into a future year, and if you have net passive activity gains in a future year, you can deduct those losses against those net gains in the future year.

In your case, your are net even on your passive activities. You have loss in one passive activity and gain in another passive activity, and they cancel out. Since you do not have a net passive activity loss overall, all of your passive activity losses are allowed. So in your case, that would mean you would have 0 net rental income overall.

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If you report your rental income on Schedule E (you are renting out houses you own) on Line 21 you may have to subject the loss on the one house to a test of at-risk limitations Form 6198. If your investment in the house is lower than the $5000 loss - probably not common but possible if you've depreciated it entirely, or received it from a relative other than as an inheritance, or otherwise got it for less than the loss, your loss on the single property may be limited by the amount at risk. If the loss is less than the amount at risk and nothing is excluded by the test, the loss and profit from both should net out on Schedule E before you look at the passive activity loss test.

If you report your rental income on Schedule C (you operate a business renting out houses with more services or furnishings included, such as an Airbnb with cleaning, linens, etc) then the separate revenue and costs across the properties are combined to determine total profit.

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