Deducting Rental Prop Mortgage Interest - 2 Options

[virs]

What is the name of your state? NC

Here is the situation. Our family gross income is over $175,000. We bought our current house for $375,000 with 20% down in 2001. We took a 5 year ARM at 4.5%.
Due to appreciation in the local market, the CMA shows that the house is worth about $500,000 now.

We are interested in purchasing a rental property. We have two options.

Option 1: Get a new loan on the rental property with minimum down.

Option 2refinance with cash out on our primary home and buy the rental property out right.

If we go with option 1, we may not be able to deduct the losses (depreciation + expenses) due to our income bracket but can accumulate it.

If we go with option 2, we may be able to deduct the interest on the primary residence from our income begining next year.

Is Option 2 a good alternative?

 

[LdiJ]

What is the name of your state? NC

Here is the situation. Our family gross income is over $175,000. We bought our current house for $375,000 with 20% down in 2001. We took a 5 year ARM at 4.5%.
Due to appreciation in the local market, the CMA shows that the house is worth about $500,000 now.

We are interested in purchasing a rental property. We have two options.

Option 1: Get a new loan on the rental property with minimum down.

Option 2refinance with cash out on our primary home and buy the rental property out right.

If we go with option 1, we may not be able to deduct the losses (depreciation + expenses) due to our income bracket but can accumulate it.

If we go with option 2, we may be able to deduct the interest on the primary residence from our income begining next year.

Is Option 2 a good alternative?

That is purely a personal decision. You could consult the professional who handles your taxes. Me, personally, I would probably go with option one. However that is simply because I don't like mixng any investment issues with the finances of my primary residence.

 

[tranquility]

To start, you will be able to deduct your losses from whatever income you will make on the rental or other passive income sources. The passive income limitation based on your MAGI may apply for any passive losses above that and you will be able to carry over the amount to future years. What do you do for a living? (Is it in the real estate industry in some way?)

The second option may not be fully deductible either. You are only allowed to deduct your qualified acquisition indebtedness (Up to $1 million) *and* the lesser of $100,000 of home equity indebtedness or the difference between the QAI and the full market value of the personal residence. Because of your facts, I assume your limit will be $100,000 of home equity indebteness. The total amount you could borrow and fully deduct the interest would be, $300,000 (80% of 375k) less any principal paid on the loan, plus $100k.

 

[Snipes5]

Most rentals aren't a passive activity.

Do ignore the verbose freak above, who has wandered in here and is trying to help, completely disregarding the comments of the experienced professionals who dwell here.

Snipes

 

[tranquility]

Are you making the claim that property rentals (like a house or apartment) are not a passive activity? What "profession" are you in?

 

[Snipes5]

I'm an Enrolled Agent. I stand by my comments; MOST rentals have active participation. And what is YOUR profession? It would appear from your comments that you think only a real estate professional can "actively participate" in when renting out property. This is a misinterpretation of the tax code. A real estate professional is SELF-EMPLOYED with relation to rental property. This is a separate issue from active participation or passive activity.

Snipes

 

[tranquility]

Active participation gives the person the right to deduct up to $25,000 over the amount netted against other passive activity. This amount is ratably limited for MAGI over $100,000 making the phase out amount $150,000. The OP said his income was $175,000 meaning he would not be able to take any of the passive loss from the passive activity. Rental real property is passive income per statute. If the person was a Real Estate professional and had Material participation in the income property, the losses would not be limited. It is an *and* test. Merely being a real estate professional does not make the income non-passive.

That most people who own income real property are "Active Participant"s, only affects the amount of passive loss limitation and not whether the income/loss is passive or not. It is you who is misinterpreting and who should review the law.