My wife and I are thinking about purchasing a 2-unit building. We would live in one unit, and rent the other one out. The idea would be that down the road, we would convert the property to a single family home. We would purchase the property with a single mortgage.
I want to understand all the tax implications before moving forward.
From what I've read, rental income gets recorded on Schedule E, and I can take mortgage interest as an expense against that income. With a single mortgage payment for both units, how would I calculate the interest that goes against the rental property?
Would there be any tax implications when I decided to convert the unit from a rental property?
Finally, as a general matter, if the expenses for the rental unit (including mortgage interest) consistently exceeded the income generated, I would never have to pay taxes on the rental income?