Rentals: Mortgage Payments Tax Deductible?

As the housing market begins to pick up again, many investors are finding themselves purchasing fixer-uppers in the hopes to jump head first into the real estate rental market. While rentals can be a profitable endeavor, they don’t come without hard work, commitment and strength, as being a firm landlord is beneficial to one that allows tenants to wreak havoc on a landowner’s real property.

While most investors understand that the IRS tax code allows the mortgage interest to be deductible, many often wonder what qualifies as rental-related expenses.

When a property owner borrows money for a mortgage, it’s not considered by tax definition to be income. As you repay the mortgage debt, this too is not considered a taxable expense. The tax consequences stem from the actual use of the funds that are borrowed. Confused? You may not be alone. In layman’s terms this means that if a business borrows money for business expenses, those expenses may be deemed as deductible when they are paid from the borrowed proceeds.

As with anything, once the loan is repaid, the tax consequences are also forgiven. If someone defaults on the loan, then forgiveness of debt income comes into consideration. For example, if someone defaults on his/her loan, he/she doesn’t have the legal right to claim tax deductions for monies that were not paid. Landlords must recognize the income that is forgiven.

Rental properties are depreciable by IRS tax guidelines. The principal loan payments are, however, recoverable by a landlord claiming property depreciation.

To make matters simple, if a landlord were to finance a $275,000 rental property at 100-percent, the property would be depreciated over a period of 27.5 years. During that time, depreciation claims would be approximately $10,000 per year that the property is owned by the landlord. The $10,000 in depreciation expenses plus the mortgage interest paid should equal tax deductions that are greater than a simple principle repayment plan.

However, as with all tax and legal advice, Better than Loans recommends contacting an accountant or tax attorney to review individual situations. Rentals can be complex and understanding the IRS tax codes surrounding deductions is financially beneficial for property owners and landlords.

Better than Loans is a hard money lender that offers fast loan funding. As a direct lender they offer loans for apartment complexes, multi-family properties, mixed use, hotels, motels, new residential developments, land development, special purpose properties, conversions and even owner occupied businesses.

Categories: Fast Loan Funding

News from the Blog

  • Hard Money FAQs
    Here are some of the frequently asked questions covering hard money loans or fast loan funding: What is a hard Read More
  • Basics About Finding and Purchasing Distressed Properties
    The real estate industry can prove to be a gold mine. It is fraught with opportunities for the discerning and Read More
  • Developing a Business Through Rental Properties
    With the financial crunch, individuals and families are turning to home or apartment rentals, rather than investing a huge portion Read More
  • A Guide To Becoming a Successful Real Estate Investor
    People see it everywhere – get rich quick schemes that promise money and good fortune. In reality, real estate is Read More