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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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We are moving here shortly but plan to rent out our current

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We are moving here shortly but plan to rent out our current house. Through the loan process we can either put a decent down payment on the new house or leave the equity in our current house. For tax purposes does it matter? I thought it may be better to do the down payment on the new house and pay higher on the house I rent b/c of taxes? What other considerations do I need to take into place when renting in regards XXXXX XXXXX?

Hello,

Thank you for using justanswer. I can assist you with your questions today. If you rent your current home and actively manage the rental and property then you can deduct up to 25K annually (assuming you file as married filing jointly). Note that if your adjusted gross income exceeds 100K then the 25K deduction is limited and foregone when your income exceeds 150K. See link here for more information (Limits on Rental Losses).

 

For tax purposes does it matter? - No it does not matter for tax purposes whether you put a decent down payment on the new house or leave the equity in our current house. It would make more sense from a tax deduction standpoint though to leave the equity in the home and put the minimal down payment on the new home. This way you get a higher mortgage interest deduction on the new home and also get interest expense on Schedule E of the old home as a rental. (note comments above, the rental real estate deduction is limited to 25K)

 

What other considerations do I need to take into place when renting in regards XXXXX XXXXX? - I think I explained the most of it above. If you do not actively manage the rental then you will not get to take any losses annually from the rental property as it would be considered a passive activity. You will however have to report income. Once you sell the property any disallowed losses from prior years will be released when you either sell the property or convert it back to personal use.

 

Let me know if you have any further questions on this.

 

Best regards,

Customer: replied 4 years ago.

Thank you please elaborate on "actively manage" as we would not hire a property manager and would manage the house ourselves if something should break, picking up rent, etc. Is this "actively managing."


 


Last question, my wife has a $10k in her 401k and no longer works. Would it be a horriable idea to use this $10k as part of the down payment given we would incur interest over 30yrs. I have a 401k so more of a tax question then retirement question. Thanks again.

Basically yes that would be actively managing.

If your spouse is over 65 then it might make sense but you would lose the tax benefit of a higher mortgage interest deduction. If she is not over 65 then it really does not make sense as she would incur a 10% early withdrawal penalty.

I would not think it beneficial to withdraw retirement savings for a down payment. Especially on a second home.
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