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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29968
Experience:  Taxes, Immigration, Labor Relations
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We currently own a home in Virginia which is our primary residence.

Customer Question

We currently own a home in Virginia which is our primary residence. We just bought a home in Ohio which needs substantial renovation. We plan to move there full time sometime in the next three years. Would it be advisable to rent it once it is renovated or would we be better off tax wise keeping it as a second home? If we decide to rent, can we deduct the renovation expenses while it is vacant?
Submitted: 5 years ago.
Category: Tax
Expert:  Richard replied 5 years ago.

Good evening. If you keep it as a second home, you can only deduct the interest (limited up to a $1,000,000 in mortgage loans between both houses) and the property taxes. Plus you have no revenue. If you rent it, you can deduct all the expenses, such as insurance, repairs, etc. You can also depreciate it. And, you have revenue, which is taxed. The renovation expenses would not be deductible, but would become part of the depreciable basis of the property. The expenses would not be deductible until you had completed the renovations and held the property up for rent.



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Customer: replied 5 years ago.
Maybe I need to provide more information so I can make a calculation. The mortgage , taxes and insurance run about $550 a month. Not a lot but I don't think it could be rented for any more than $1000 a month, making the positive cash flow about $400 a month not counting other expenses and probably a property manager since we live out of state. We gross $195000 a year and our major deduction is interest on our residence, $25,000 per year.

What I am trying to determine is whether the tax benefit from renting outweighs that of calling it a second home would be worth the problems involved in being a distant landlord.

I don't need exact figures, just a ballpark idea of the benefits of both options.
Expert:  Lev replied 5 years ago.
Hi and welcome to Just Answer!

There is no "tax benefits" from renting. Your benefits are rental income.
If your expected rental income $1000 a month * 12 = $12,000
Your rental expenses are mortgage interest, real estate taxes and insurance $550 a month * 12 = $6,600
Please be aware that only mortgage interest is deducted - not part of the payment attributable to principal. The cost of rental property is recovered via depreciation. Residential rental property is depreciated over 27.5 years. That means if your cost basis is $100,000 - you will deduct depreciation $100,000 / 27.5 = $3636.
The drawback is that depreciation will be recaptured and added to your income when you sell the property.
Additional overhead of keeping record and tax preparation will be ~$100-$200
If you hire a property manager - it might cost ~10-25% of your gross receipts - and will cost at least $1200 per year.
Seems as you will have losses from rental activity and that will be passive activity - so such losses may be deducted only against your other passive income or will be carried forward and will be deducted when eventually you sell the property.
Thus - most likely rental activity will not affect your current tax liability - but will provide the positive cash flow to cover ongoing expenses.

If you plan to convert a rental property into your personal property - you would need to live in that property at least five years to exclude capital gain (not two years) - so that might be additional disadvantage in future, but if you plan to live there at least five years - than there will not be any difference for you.

Let me know if you need any help or clarification.
I will adjust your estimations if you provide more précised amounts.