Rental Expenses

[Safford]

s About Taxes)/Rental Expenses Advertisement Expert: Jay Allen Finn, CPA - 7/11/2008 I am considering the purchase of a condo in Pasadena, CA, that will be a primary residence in a year or two.  In the meantime I will need to rent it to reduce my expenses.  I expect that the PITI expenses on this condo will be around $3500/mo with a rental income potential of around $1500/mo.  I understand that there will be no tax consequence on the $1500/mo income do to the expenses, but how can I reduce my overall tax burden with the approximate $2000/mo of expenses over income.  I do understand that the payment of principle on the mortgage will not be counted as an expense. Are these expenses reported as losses on my regular tax return, thus reducing my taxes on my retirement income?

Thank you,  Garry

ANSWER: Gary on your question:  If you check the right boxes on your schedule(E on your 1040) such as "material participation"(this shows you personally oversee your property). - Interest, property taxes and insurance and fix-up expenses are all deductible and of course the rent is income(all on the Schedule E itself) but as a landlord for the period you do rent you are supposed to figure the building(net of land)  as a depreciation deduction usually under what is called "MACRS"(similar to 27.5 years.). You can find detailed information on "IRS.gov) within the depreciation publication, as well as one on residential rentals.

You can find detailed information on "IRS.gov) within the depreciation publication, as well as Pub 527. on residential rentals.

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If my rental expenses are more than my rental income, can I declare these expenses as losses against my retirement income which is reported on the Schedule 1040?

[Osburt]

Yes you can.  As long as you utilize the Schedule E as explained(properly), losses can be taken up to $25,000.00 per year.  After that it is more tricky and you have to capitalize them in the sale itself. Also, I need to tell you that once you make this a permanent residence, you must live in it for 2 out of the last 5 years to mitigate capital gains.  Also this is current law only and Congress could change it such as in 2009 and following. Again see Pub. 527 for more details.