Can I Continue to Deduct Rental Interest After Property is Sold

If you own a rental property and derive rental income from it, there are expenses that you can deduct on your tax return. These include operating expenses, property tax, depreciation , repairs, and mortgage interest . The mortgage interest deduction is a tax incentive for homeowners, which can sometimes apply to rental property.

Mortgage Interest Deduction

The mortgage interest deduction allows you to reduce your taxable income by the amount paid in mortgage interest over the course of the tax year. Loans used to buy, build, or improve the property qualify for this deduction as long as the debt is tied to a qualifying primary or secondary residence up to $750,000. Borrowers who took out a mortgage loan before December 16, 2017 can deduct the interest on principal up to $1 million.

Unfortunately, the mortgage interest deduction isn't available for investment properties; however, mortgage interest can be deducted as a business expense to lower taxable income by filling out Schedule E on your tax return.

For rental property, here's how you could deduct mortgage interest as a business expense: Let's say you purchased a rental property for $500,000 with a $350,000 mortgage loan. For the first year of the loan, let's assume that the interest amounts to $15,000. If your rental property produces $50,000 in rental income for the year, you can take a $15,000 deduction for the mortgage interest, which reduces your taxable rental income to $35,000.

Your lender should send you Form 1098 each year to show you how much you've paid in mortgage interest for the year.

What about Expenses Incurred When Obtaining a Mortgage?

Although you can't deduct any expenses you had to pay when obtaining the mortgage on your rental property, you can add these expenses to your cost basis in the property. They are depreciable, along with the property. These expenses include:

• Legal fees
• Mortgage commissions
• Surveys
• Appraisal
• Title insurance
• Recording fees
• Charges for installing utility services
• Transfer taxes
• Amounts the seller owes but you agree to pay such as back taxes, mortgage fees, charges for improvements or repairs, and sales commission.
  

Common Deductible Interest Payments

Interest deductions aren't limited to mortgages. Here are some common deductible interest payments for owners of rental properties:

• Mortgage interest payments used to acquire the rental property
• Mortgage interest payments used to improve the rental property
• Interest on credit cards used for goods or services in rental activity
• Interest on personal loans taken out to purchase items used in rental activity

Mortgage Interest Deduction Limitations

There are limitations on how much you can deduct on business interest expenses. These limits are known as the " section 163(j) limitation ," which began in 2018. This limits a taxpayer's business interest deductions for the year to the sum of:

1. 30 percent of the taxpayer's adjusted taxable income for that year

1. The taxpayer's business interest income for that year

1. The floor plan financing interest for that year

All businesses with average gross receipts of $26 million (indexed for inflation) or more over the past three years can deduct interest payments only up to 30 percent of their adjusted taxable income. Rental property owners who earn or exceed this amount can get out of this and deduct 100 percent of their interest expense each year by filing an election with their tax return.

Other Types of Deductions for Rental Properties

Mortgage interest isn't the only important deduction available if you own a rental property. Additional deductions include:

• Property taxes
• Depreciation
• Repair and maintenance costs

You also can deduct normal expenses incurred from operating and managing the property. These include insurance, utilities, advertising, travel expenses, and supplies used to keep up and maintain the property.

You can't deduct expenses used to improve the property, though. However, you can recover a portion of these costs using Form 4562 the year you made the improvements or added furnishings to your property. 1

If you still have questions about which expenses are deductible for your rental property, consider a discussion with an experienced tax professional to go over your particular situation.

^{This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.}

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Source: https://www.realized1031.com/blog/can-you-deduct-mortgage-interest-on-a-rental-property

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