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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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My elderly mother is in the process of selling her current

Customer Question

My elderly mother is in the process of selling her current home and buying a smaller home. She is not able to get a mortgage without my cosigning. She found a home she likes very much but the buyer of her home backed out yesterday. In order to give her more time to sell her home I may need to buy the new home she found and rent it to her. If I buy the new home and rent it to her at a fair market rate will that benefit me in the form of tax deductions? The mortgage will be $110,000. I own a home with a mortgage so this will be a second home/rental property. I itemize deductions on my tax return. Thanks.
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to our site!If you rent the home to your mother and charge fair rental value - you will report rental income and rental deductions on schedule E.That is not related to whether you itemize or not.If you will have net rental income - that income is taxable,but if you realize rental losses - they are deductible from your other taxable income - up to $25k of losses - and if your adjusted gross income is below $100k.
Expert:  Lev replied 2 years ago.
If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit. Postponing decision. If you are starting your rental activity and do not have 3 years showing a profit, you can elect to have the presumption made after you have the 5 years of experience required by the test. You may choose to postpone the decision of whether the rental is for profit by filing Form 5213. You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity.
Expert:  Lev replied 2 years ago.
So far - there woudl not be any additional tax benefits if you rent the property.The purpose of renting is to have additional income - and that income woudl be taxable.
Customer: replied 2 years ago.
Thanks for your answers. I was in the process of co-signing the mortgage so I know what the mortgage, taxes, etc. are. I will need to determine the fair market rent to see how much of a profit, if any, I would have each year. I have no experience with rental properties.
Customer: replied 2 years ago.
Your last sentence was very helpful. I was not thinking about this correctly. So, it is possible that based on a fair market rental and with the deductions I could possible show just a small profit. Would you happen to know if I were to sell my current home and purchase a new home and apply for a mortgage whether having the rental property would be a hindrance in getting another mortgage? Thanks again for your help.
Expert:  Lev replied 2 years ago.
Specifically for rental activity -
I may review IRS publication 527
If that is a rental property - you will deduct mortgage interest, real estate taxes, etc.
However - the value of the property itself - would be depreciated.
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
When you sell the rental property - you will realize either gain or loss - that is calculated as (selling price) MINUS (adjusted basis)
The basis is mainly your purchase price - adjusted by purchase expenses, improvements and reduced by depreciation.
When you sell your primary home - the gain is calculated similarly - but you are eligible to exclude that gain from taxable income - up to $250k for single person - if you owned and used the property as your primary residence at least two out of last five years before the sale.
That is regardless how proceeds are used.
Let me know if you need any help.