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Old 10-05-2011, 02:38 PM
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Rental Income

In 2009, my husband and I jointly purchased a condo with our daughter......50%/50%.....as an investment. We used a mix of savings and and funds ($100,000) from our home equity line of credit to pay for our half, though we also used funds from the home equity line of credit to make improvements in the condo and for other purposes (an additional $100,000). During 4 months of 2010 and 8 months of 2011, we rented our half of the condo. We don't intend to rent again. In 2009 (no rental), we deducted the full amount of interest on the equity line of credit Form 1098 on Schedule A, line 10. I am preparing the 2010 federal return at this time. Should I attempt to split the interest on the equity line of credit reported on 2010 Form 1098 and report the portion estimated to be attributable to the purchase and improvements for the number of months the unit was rented on Schedule E, line 12, while the balance would be reported on Schedule A, line 10? We pay 50% of the property taxes and 50% of the monthly HOA fees on the condo. I presume we would report the property taxes attributable to the months the property was rented on Schedule E, line 16. Can the portion of HOA fees we paid be deducted as part of the rental expense for the months the property was rented? On line 18 of Schedule E? Can property taxes paid on investment property not rented be deducted on Schedule A?



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Old 10-05-2011, 06:29 PM
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“ . . . we deducted the full amount of interest on the equity line of credit Form 1098 on Schedule A, line 10. “--->By itemizing your deductions on Sch A line10, you can usually deduct the interest you pay on a mortgage for your main home or a second home. Mortgage interest is any interest you pay on a loan, in this case, equity line of credit, secured by the Condo, a second home.
“ Should I attempt to split the interest on the equity line of credit reported on 2010 Form 1098 and report the portion estimated to be attributable to the purchase and improvements for the number of months the unit was rented on Schedule E, line 12, while the balance would be reported on Schedule A, line 10? “---->It depends on the situation; I assume that your condo is vacation home; I mean the property, in 2010, was rented for 15 days or more( As you said it was rented for 4 months) and was used for personal purposes for more than 14 days or 10 % of the days rented, whichever is greater, then allocable rental expenses are allowed only to the extent of your rental income. Your allocable rental expenses,i.e., real estate taxes, mortgage interest expenses, operating expenses(i.e, repairs or maintenance or etc) and depreciation are USUALLY deducted in three separate steps: first, you must deduct interest& taxes;second, operating expenses are deducted; and third, depreciation expense is deducted. For your operating expenses,i.e., utilities or repairs or etc and depreciation expenses to be deductible , there must be positive rental income following the deduction of items in the preceding step(s). The expenses, other than interest and taxes, are ONLY deductible to the extent of that positive. ALSO you must allocate expenses between the rental and personal days before the limits are applied.You may deduct expenses related to investment property as rental real estate costs from the point you actively begin seeking to rent the property. For example, you who purchase the Condo an investment property, refurbish it and then begin to seek tenants cannot immediately deduct costs related to the acquisition and refurbishment(improvements) of the property as rental real estate. The costs must be capitalized and included in the basis, or total cost, of the property. Most costs subsequent to the completion of the refurbishment, however, are deductible on Sch E line 20, NOT on Sch A. For example, assume that you rented the Condo for 120 days in 2010 and used it for personal purposes for 240 days, and gross rental income was $15,000( after you split it with your daughter’s portion), R/E taxes & interest was $15,000, operating expenses were $21,000 and deprecation was $12,000. Then you rental portion is 1/3(120/360; just make it 360 days instead of 365 days for convenience).
Your rental income--->$15,000
Less: interest& taxes--->$5,000 (1/3*$15,000); you can’t deduct $10,000(personal portion)
Balance: $10,000 ($15,000-$5,000)
Less: operating expenses(utilities or repairs or etc) --->$7,000 (1/3*21,000); you can’t deduct $14,000
Balance:$3,000($10,000-$7,000)
Less depreciation(1/3 of 12,000 but is limited to $3,000 as the amount the balance is $3,000, NOT $4000)
The interest and r/e taxes($10,000;$15,000*2/3) allocable to your personal use of the Condo are deductible as itemized deductions on Sch A line 6 and 10. The personal portion of the utilities, repairs, and depreciation is a NON-deductible personal expenses; you can NEVER deduct them on Sch A.You’d lose nondeductible depreciation expense in rental use, in this case, $1,000;$4,000-$3,000=$1,000.
“We pay 50% of the property taxes and 50% of the monthly HOA fees on the condo. I presume we would report the property taxes attributable to the months the property was rented on Schedule E, line 16. Can the portion of HOA fees we paid be deducted as part of the rental expense for the months the property was rented? On line 18 of Schedule E?”---->Correct; as the property is a rental, you can deduct a portion , I men 1/3 of the HOA as part of operating expenses. However, your homeowners association fees are NOT deductible for personal purposes.
“ Can property taxes paid on investment property not rented be deducted on Schedule A?”---->I depends; If you cannot classify the property as rental real estate, you may claim investment costs,i.e. property taxes, interest expenses or etc.as an itemized deduction on Sch A line 6 and 10( As long as your itemize your deductions on Sch A).However, as long as the investment property is classified as rental real estate , you need to deduct the property taxes on Sch E line 16, NOT on Sch A.


Last edited by Wnhough : 10-05-2011 at 06:31 PM.


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