Renting underwater home has tax implication
received a 1099 for income I received from renting my townhouse. This income is less than the mortgage payments I paid. How do I file this on my federal and state income taxes? By the way, I had no choice but to rent the property because I am underwater. I owe $20,000 more than what the property is worth.
We’ve been hearing a lot about how the real estate market has improved all over the country. Unfortunately, there are still millions of homeowners who, like you, are either truly underwater with their mortgages or are what is known as “functionally” underwater, where the property is worth about the mortgage amount, but the homeowner would have to bring a check to the closing due to the costs of closing.
Bill Nemeth, an enrolled agent and partner in Atlanta-based Tax Audit Guardian, notes that the 1099-MISC form you were sent has an entry in Box 1, “Rents.”
When filling out your tax return, you would put the income from Box 1 and the expenses of the rental property on Schedule E. Nemeth notes that adding this rental property to your tax return may provide a tax benefit to you by reducing your taxable income because you’re offsetting your income (the rent) with your expenses.
“Investment property expenses might include the mortgage interest paid, real estate property taxes, casualty insurance, association fees, utilities (including gas, electricity, water, sewer and garbage pick-up), any repairs the owner made to the property, the auto mileage the owner drove to pick up rent checks and check on the property), and other expenses like that,” Nemeth notes.
He adds that owners of investment property also can deduct depreciation. The purchase price of the property is depreciated over 27.5 years, or 3.636 percent per year.
“Your depreciation calculation is based on the value of the property when you put it into rental use (it is the lower of the cost to purchase the property or the fair market value),” he adds. “Since