Rent­ing un­der­wa­ter home has tax im­pli­ca­tion

Sun Sentinel Broward Edition - Homespot - Broward East - - FRONT PAGE -

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

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