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I will be soon building a second home to be used as a primary residence. After that home has been completed, I will be renting my current home to a family member. They will be simply paying my current mortgage payment to me in the form of rent.

Can I deduct the mortgage interest from the home my family member will be moving into? The amount they will be paying me as rent is lower than fair rental price, so I'm not sure that qualifies under IRS law, as the unit will still fall under my personal use:


"A day of personal use of a dwelling unit is any day that it is used by:

You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main home under a shared equity financing agreement
A member of your family or of a family of any other person who has an interest in it, unless the family member uses it as his or her main home and pays a fair rental price
Anyone under an agreement that lets you use some other dwelling unit
Anyone at less than fair rental price"


http://www.irs.gov/taxtopics/tc415.html

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You can deduct up to the amount of rent collected if you are not charging fair market value. ie. rent collected $5000, mortgage interest/insurance/repair for the year is $10,000. You can only deduct $5000.

So, if the amount of rent I'm charging is $1050, the maximum I'm capped at would be $12,600? This amount can also be added to the mortgage interest of my newly built home, correct?

Correct about $12,600 in schedule E. But the limit doesn't apply to your OO property. That is separate own deduction.

Great. Thanks for the clarification and the help.

Once you rent the property to someone else, it will be considered as your investment property. In that case, though you may deduct the rental payments, it may not be considered as a mortgage interest deduction. It will be better if you could get in touch with a tax adviser and take his opinion in this regard.


Remember... just "paying your mortgage" and you seeing a break-even cost in terms of cash can still leave you with a tax liability. Factor in cost of repairs/maintenance/insurance/taxes/etc. too.

You are correct that your current home that will be occupied by a relative who will be paying the mortgage which is less than fair rental is personal use. As such, deduct all mortgage interest and property tax on Schedule A. You are allowed to deduct mortgage interest on two homes. For the second home, the deductible interest is for acquisition debt only.

The money your relative pays you is a not for profit rental. It goes on Form 1040, Line 21 "Not for Profit Rental." Besides the mortgage interest and property tax, which you can fully deduct, you have other expenses for the rental, they may be deducted on Schedule A as miscellaneous deductions subject to 2% of AGI.

These deductions (including mortgage interest and taxes) must be taken in a certain order (see Pub 535), and you cannot deduct more than your income on Line 21. Given that you must maintain and insure the home, you may be able to break even and not owe any income tax on the rent received.

ninasgramma said:   You are correct that your current home that will be occupied by a relative who will be paying the mortgage which is less than fair rental is personal use. As such, deduct all mortgage interest and property tax on Schedule A. You are allowed to deduct mortgage interest on two homes. For the second home, the deductible interest is for acquisition debt only.

The money your relative pays you is a not for profit rental. It goes on Form 1040, Line 21 "Not for Profit Rental." Besides the mortgage interest and property tax, which you can fully deduct, you have other expenses for the rental, they may be deducted on Schedule A as miscellaneous deductions subject to 2% of AGI.

These deductions (including mortgage interest and taxes) must be taken in a certain order (see Pub 535), and you cannot deduct more than your income on Line 21. Given that you must maintain and insure the home, you may be able to break even and not owe any income tax on the rent received.


Awesome, thank you very much for the clarification! One other question...am I also able to claim depreciation on the rental, calculated over 27.5 years?



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