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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10131
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Scenario: We are considering buying a house with a guest house

Customer Question

Scenario: We are considering buying a house with a guest house that is not permitted as a rental. We would rent the guest house, and want to know if there would be any tax deductions. We also have some related questions.
Questions:
1. Should we have itemized for the last tax year (based on ~19k of mortgage interest and property tax paid)?
2. If we bought the house, can the rented guest apartment be a tax deduction if it is not permitted as a rental?
3. Are property taxes tax deductible for the house that we will live in and own (not talking about the rental now, just want to know if property taxes are a deductible expense)?
4. What is the standard deduction rate for married couple filing jointly for 2015?
5. Based on the anticipated mortgage interest, and property tax rate, would we be expected to exceed the standard deduction limit for the 2015 tax year?
6. Can the rented guest apartment be deducted from taxes (per amortization schedule over 27 years)?
7. Do our itemized deductions need to exceed the standard deduction limit for us to deduct the amortized rental property value, or is this deducted from the rental income regardless of whether or not our deductible expenses exceed the standard deduction?
8. Any advice on the matter is welcome.
Thank you,
Robert
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,(1) Yes, you sid "we" so I'm guessing you file as married filing jointly - for that the standard deduction is 12,600, so th 19K already gets you over that..(2) Yes, you may have a property law problem, but all IRS cares about is whether you did rent and that you report the income as well as the expenses.(3) Yes, that's why I mentioned that the Mortgage interest alone would get you over just taking the standard deduction - property taxes are deductible on Schedule A as an itemized deduction for the residence, and the portion for the rental would be a rental expense on the schedule E (where you report the rental income and expenses).(4) 12,600.(5) Easily.(6) Yes that's anoher of the rental expenses on schedule E.(7) The amortization (becasue as mentioned above, on schedule E as a rental expense) doesn't come into play with itemized deductions on schedule A - and again, you're well over the standard deductions - but yes deducted from the rental income on schedule E.(8) You've done an excellent job of asking questions ... one other thing that comes to mind is the checklist of things that haven't been mentioned that are also rental expenses on schedule EHere's a good article with a fairly exhaustive list and some other pointers about rental deductions: http://www.houselogic.com/home-advice/tax-deductions/tax-deductions-rental-homes/
Customer: replied 1 year ago.
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Customer: replied 1 year ago.
Regarding question # *****: Just to be clear, does whether or not we exceed the standard deduction make any difference with respect to deducting rental property value? I anticipate that we will eventually pay down our mortgage to the point that we no longer meet the standard deduction, and I am wondering if we would continue to benefit from a tax deduction on our rental income after that point.
Expert:  Lane replied 1 year ago.
No,In doing taxes one either takes the standard deduction or uses itemized deductions from schedule A (and if they're smart, they take the larger) :0).But rental income and expenses are reported separtely on schedule E (which flows to the 1040 online 17 and has it's OWN effect on taxable income), before ever getting to line 40 of the return where you enter either itemized or standard deduction and lower taxable income further..Lane
Expert:  Lane replied 1 year ago.
SO, just to try to be clear ... the rental income AND EXPENSES will raise AND LOWER, (depending on the net between the two) taxable income.Itemized deductions OR standard deductions ALWAYS lower taxable income.And itemized deductins are a specific set of deductions, and the rental expense deductions are a DIFFERENT set of deductions..Make sense?
Expert:  Lane replied 1 year ago.
Hi,
... just checking back in to see how things are going.
Did my answer help?
Let me know ...
Lane
Expert:  Lane replied 1 year ago.
Hi,
DId my answer help?
If so would appreciate a rating...
If no, I would love to get you there.
Let me know...
Lane