To those who rent out their home....

[livsea2]

We are coming down in a few weeks to hopefully buy a home and out intention is to rent it out for a couple years.
I was planning a home equity loan for the purchase but I was wondering if there is any tax benefit to getting a stand alone mortgage for what will be a rental for some time. Are there deduction or depreciation benefits I would be missing or are they the same regardless of how you manage the purchase. Any opinions would be appreciated.
Thanks...

[Cassie325]

Liv....there is some sort of "loan" that you can take from your own retirement account to buy property as long as you are not living in it full time. I am not sure of all the details so you would have to talk to your financial person...but it seemed to be a good deal. That way you don't have to pay anyone back...you can pay cash for the house....and get rent for it. Again talk to your financial person....

[SteveFromNY]

I rented mine for a few years. As a business, all of the expenses are deductible, including the mortgage payment (Perhaps it is only the interest, but on a new loan that is almost the entire payment). I went with a conventional mortgage from Citizen's. Now that I've stopped renting, and sold the house up north, I was able to keep that loan (at a favorable interest rate) and just pay off a huge portion of the principal without any closing costs. They recalculated at the smaller principal, reduced payments, and continue to escrow my taxes and insurance.

[Russ_Boston]

I'm no tax pro but I think the limit on tax deductiblity for Home Equity loans or lines is $100,000. You can take more but over 100K may not be tax advantaged. You should at least inquire about that before heading down that path. I would think that you'd want to have it distinct and separate from your current home. The same reasoing would go for the 401K issue I would think.

[SteveFromNY]

I think Russ's point about distinct and separate is a good one. If you have a separate mortgage on the rental property it will be cleaner and easier to demonstrate your expenses are tied to the property. A mortgage on another residence used to purchase the rental could get messy - just proving that the proceeds were used to purchase the property - are there other amounts in the equity line used for other purposes? Can you prove it? Certainly, in retrospect for me at least, there were none of these issues. The expenses I was deducting were directly related to the property.

[livsea2]

Liv....there is some sort of "loan" that you can take from your own retirement account to buy property as long as you are not living in it full time. I am not sure of all the details so you would have to talk to your financial person...but it seemed to be a good deal. That way you don't have to pay anyone back...you can pay cash for the house....and get rent for it. Again talk to your financial person....




(I don't know what happened to my post, but I'll answer again)....I spoke to my adviser who Strongly advised against it. He said every client he knows of who's tried it runs into yearly IRS audits. It's legal and can be done but it raises red flags at the IRS and it isn't worth the trouble. I agreed and will steer clear.

[MelZ]

I agree with what was already said.

When I spoke to my CPA he was adamant that we run the rental as a separate business. He document everything and keep separate books.

[aln]

I did it with a 2nd mortgage for 2.5 years. Now would not be a good time to borrow from your 401k or any other such retirement account as prices are so low. I also used a tax professional to do my taxes. You'll find you'll be able to deduct inspection trips to and from your current home to the business home as well as furnishings upgrades maintenance etc. When you finally move in though you may take some kind of tax 'hit' so save some for later.

[SteveFromNY]

Aln - What kind of tax hit are you referring to?
I think I am covered - all of my expenses were actual expenses as they occurred. Monthly expenses mostly. But the depreciation for the furniture was taken over ten years.

[Cassie325]

(I don't know what happened to my post, but I'll answer again)....I spoke to my adviser who Strongly advised against it. He said every client he knows of who's tried it runs into yearly IRS audits. It's legal and can be done but it raises red flags at the IRS and it isn't worth the trouble. I agreed and will steer clear.


YIKES....good to know and will pass it on to my friends that were interested in this!