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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15480
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I have a question about mortgage interest deductions on rental

Customer Question

I have a question about mortgage interest deductions on rental property. I started renting out my home in 2012, and now work overseas for a few years. I have read that if you rent out your home and intend to return to it, the interest deduction may not be subject to the Passive Activity Rules. I cannot find out any detailed explanation of this nor how to go about reporting the interest on my forms.

Please help.

Thanks
Submitted: 1 year ago.
Category: Tax
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

MyVirtualCPA :

If you rent out your home, the mortgage interest that you pay out is subject to passive activity loss rules, because it is a rental property.

MyVirtualCPA :

The exception to the rule would be if you rented the house out not more than days per year, then you can deduct the interest as an itemized deduction

MyVirtualCPA :

However, if your house is a rental it must be deducted on schedule E, and will be subject to passive loss limitations.

MyVirtualCPA :

You can read about this in publication 936, accessible at the following web address: http://www.irs.gov/publications/p936/ar02.html#en_US_2012_publink1000229917

Customer:

I have read that Publication. But I also read in the Ernst & Young Tax Guide that there is an exception to that general rule. As I stated before, I read where you rent out your home, intending to return to it after a few years, the mortgage interest may not be subject to the PAL rules.

MyVirtualCPA :

That is not true. It would always be subject to the passive activity loss rules.

MyVirtualCPA :

while you are renting it out

Customer:

The you're saying what I read is wrong.

MyVirtualCPA :

I am saying that all I've ever heard, is that when you rent out a property you can deduct the mortgage interest on schedule E

MyVirtualCPA :

Which, if you're not a real estate professional, is subject to the passive activity loss rules

Customer:

Looks like I am going to do some more research.

MyVirtualCPA :

Do you have a link to that guide? I could take a glance at it

Customer:

The website is <ey.com/EYTaxGuide> , but it may not give you page by page access. The note is on page 228 under (Tax Saver) at the bottom of the page.

MyVirtualCPA :

Okay let me take a look. Thanks

MyVirtualCPA :

Did you purchase access to this?

Customer:

I purchased the book.

MyVirtualCPA :

Okay I do not have access to that, because I did not buy it.

MyVirtualCPA :

But, the way to keep the mortgage interest from appearing under passive activity loss limitations, you would deduct the amount on schedule A instead of schedule E

MyVirtualCPA :

however, I have never heard that you could deduct the full mortgage interest if you were renting out the unit and intending to return to it.

Customer:

That's true, but I want to make sure it's "ok" to do that in this instance. It was only rented out 5 months in 2012, and I can deduct the interest when I lived in it on Sch A. I may try to put all the interest on Sch A and see what happens. And I will do some more research. Anyway I can get back to you, if I find any more info?

MyVirtualCPA :

Yes, you can come right back here and I will assist you with your issue.

Customer:

OK, Thanks.

MyVirtualCPA :

Would you please rate my response as "excellent" so that I may receive credit for assisting you today?

MyVirtualCPA :

We can still continue our discussion, even after you rate.

Customer:

When I click excellent service and hit SUBMIT, it will cancel out this chat.

MyVirtualCPA :

You will still be able to return and ask questions as needed

MyVirtualCPA :

Trust me, I work with customers all the time like this.

Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15480
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 6 other Tax Specialists are ready to help you
Expert:  Megan C replied 1 year ago.
Thanks, Roger for the positive rating. I look forward to continuing to work with you. Please come back any time you need assistance. It was a pleasure working with you today. I can also answer finance and social security questions as well, so please keep that in mind.
Customer: replied 1 year ago.

Am I doing this right?? Still there?

Expert:  Megan C replied 1 year ago.
Yes, I am still here.
Customer: replied 1 year ago.

Did you get my previous message?? Which was - google Ernst & Young 2011 Tax Guide (pdf). Access page 215 and you will see the same Tax Saver message as in the 2013 Guide.

Expert:  Megan C replied 1 year ago.
Roger,

I will take a look and do some research and get back with you.

Thanks!
Customer: replied 1 year ago.

I will be here till about 5:00pm. Will that time line work for you? Or tomorrow?


 


Thanks


 

Expert:  Megan C replied 1 year ago.
When I post my reply, you will get an email. You can respond to me at any time. I don't have to be right there, but I will respond to your message quickly. I'm on all day and most of the night.

Thanks
Customer: replied 1 year ago.

Still have not had a reply from you. I went on-line to do my own research and found the answer I needed. Sorry, but I feel I wasted $38.00.


 


 

Expert:  Megan C replied 1 year ago.
The only time that the interest deduction is not subject to PAL rules, is if you do not rent for profit. IF you do not rent for profit, you cannot deduct any more expenses than your rental income. If you rent for profit, then the PAL rules apply.

Thanks, Roger and have a great day.
Customer: replied 1 year ago.

That's true. But my situation was different. And yes, you can bypass the PAL rules in the situation in my original question. There are some excellent articles about that on line with the corresponding IRC numbers that relate to it. You might want to investigate that further in case someone else asks a similar question.

Expert:  Megan C replied 1 year ago.
I'm sorry for the delay in getting back with you. I had posed the question to a colleague of mine, and was waiting to hear back from him on his thoughts. He works with a lot of expats, and would know this straight away. I hadn't heard from him since I emailed him the question.

But, I did do some extra research since you popped in this morning.

Look at Sec. 469(j)(7) and Tres Regs. Sec. 1.1034-1(c)(3)(i). You can also CLICK HERE for an article. Not sure if you read that one or not, because it's from a Journal of Accountancy publication.

Please let me know if you have any further tax questions. Just pop in on this thread and I will answer them, even if they are unrelated to your original question and there will be no additional charge for that. (You're only charged again if you post a new question, or if you rate this question a second time) I can also assist with finance and social security questions as well.

Thanks again for being a valued JustAnswer.com customer, and have a great day.
Customer: replied 1 year ago.

Thank you very much for responding and with the link. I had seen similar articles, but yours was the most comprehensive. I may have been a little inpatient with my criticism of your information, but you finally came through with flying colors.


 


Much appreciated.

Expert:  Megan C replied 1 year ago.
Thanks for your kind words. I'm glad I was able to come through. I'm sorry for the delay, I was just waiting to give you the best information. But, in the end you are satisfied and that was my goal.

In a couple of days you may receive a survey. If you would rate me highly on that survey it would be appreciated. It will assist me with my ranking on the site, and the ability to continue answering questions for others.

Thanks again, Roger.

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Megan C
Megan C
Tax Professional
15480 Satisfied Customers
Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level