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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?
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.
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:
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.
