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I own two properties which I rent out. I am also paying mortgages on each of these properties (I'm not sure if this matters). How is the rental income taxed? Do I have any options regarding how this is taxed? Any things I should consider?

EDIT:

I live in Seattle, WA, USA.

The homes were purchased in 2003 and 2008.

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Did you just buy them in 2010? If you owned them prior, you might have to amend your returns.

Rental property income and expenses is declared on a Schedule E and once you add all your expenses along with depreciation, you may show a loss. You can take that loss against ordinary income if your gross income is under a certain level, $100k MAGI begns the phaseout range. Otherwise, it carries over. A gain flows to your 1040 as ordinary income.

I just saw your edit. You bought these 8 and 3 years prior to posting this question. How were you handling your taxes all this time?

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    I want to stress depreciation. Remember that you MUST depreciate the property according to IRS. If you don't the depreciated value is used when you sell anyway. So take advantage of it. – Vitalik Mar 10 '11 at 12:21
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    You may also be subject to state and local income taxes. – bstpierre Mar 10 '11 at 12:32
  • Do expenses include mortgage payments? – three-cups Mar 10 '11 at 14:19
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    mortgage interest is deductable, same as primary residence. – Vitalik Mar 10 '11 at 14:27
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    Any repairs and improvements are also considered expenses. Improvements (appliances, a new floor, etc.) also need to be depreciated. Depreciation just means that the expense is taken over time, not all at once. The length varies from 5 to 30 years, depending on what is being depreciated. – KeithB Mar 10 '11 at 14:56

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