Real Estate Income Question

**bhuether** · 03-09-2009, 08:09 PM

My wife and I own a house. We have an interest only loan. It is quite a bizarre loan product (esentially a HELOC which credit reports see as revolving credit account and it is not even treated like a first mortgage - we also pay no mortage insurance which we are not complaining about) and is byproduct of lenders being ultra creative which got lending industry in mess it is in now... In any case, our mortgage payments are insanely low right now - around $800 a month with the mortgage rate equaling prime minus a qtr. Our renter pays us $1800. But for purposes of filing taxes, I don't view the difference ($1000 for the current month for example) as rental profit. My wife and I have essentially treated our interest only mortgage like a regular mortgage where you pay towards principal So we end up paying around $2000 a month so that the mortage 'behaves' more like a regular mortgage such that we are paying into principal and not setting ourselves up for disaster (we expected to sell after 3 years but housing market did what it did and so we are left with the house and weird mortgage...)

So with that said, do we really need to claim the rent-mortgage difference as profit since the difference in no way is treated as profit but rather as a means to normalize a bastardized mortgage which can not be refinanced into a normal mortgage since the home value to loan ratio is quite bad due to depreciation?

thanks,
brian

**hardmoneymikey** · 03-09-2009, 08:59 PM

First and foremost, you may want to seek advice from a professional in the tax preparation industry. It is likely that you would benefit from paying a few hundred bucks a year to one anyway.

That being said, it doesn't sound like you have cash flow income to worry about in this scenario. What I mean is that you said you paid $2,000 in every month, and only collect $1,800 a month in rent. Is this correct?

Where is the taxable income?

**bhuether** · 03-09-2009, 10:33 PM

Correct, but the mortgage minimum payment is technically $800 a month (this month anyway). But that is interest only and so we pay $2000 a month in order to pay towards principal at about the same rate as a normally amortized mortgage. So I view $2000 a month as our true mortgage payment.

thanks,

brian

**thomas12** · 03-09-2009, 10:55 PM

I am not against anybody by if you look over the market and anlyase it you will find that it is not bad to go for. however if you consult any professional then you will get you reply ranging around the same assumption stated by my above friend.

**REI GIANT** · 03-14-2009, 02:38 AM

You can only deduct the interest and other expenses you can not deduct additional principal payments.Your mortgage company should have sent you a 1098 showing the interest you paid on your mortgage in 2008 and one to the IRS. You are not intitled to deduct principal payments so don't or you will most likely get audited by the IRS.

REI GIANT

**clintonbaisley** · 05-13-2009, 05:31 AM

Real estate and mortgage is one of the best and safest ways to earn a healthy income...of course there are risk factors. but it is very very less compared to other businesses.

**kevin@BootStrapLearning** · 05-13-2009, 09:07 AM

So with that said, do we really need to claim the rent-mortgage difference as profit since the difference in no way is treated as profit but rather as a means to normalize a bastardized mortgage which can not be refinanced into a normal mortgage since the home value to loan ratio is quite bad due to depreciation?

thanks,
brian

Why are you so sure it is a profit? The property has other expenses besides the interest on the loan such as property taxes, maintenance expenses, etc. You are also allowed to depreciate a rental property which creates an additional deduction to offset the income. My guess is that if you figured out all of the expenses and deductions against the income you would not show a profit. A good tax person can help you figure out the best way to go with all of this.

**RedCarpetSchool** · 05-13-2009, 10:35 AM

Originally Posted by REI GIANT

You can only deduct the interest and other expenses you can not deduct additional principal payments.Your mortgage company should have sent you a 1098 showing the interest you paid on your mortgage in 2008 and one to the IRS. You are not intitled to deduct principal payments so don't or you will most likely get audited by the IRS.

REI GIANT

As REI Giant said you can only deduct the interest. Anything paid down on the principal is considered income. If that was not the case then everyone out there would pay down there mortgages to hide from paying their taxes.
Now that I think of it I kind of like the idea can we all write Obama and see if he can consider that as a tax shelter. Think about all the problems that may have been avoided if people paid down their mortgages and took advantage of a possible tax break?

**jackjeffries** · 05-14-2009, 01:21 PM

Originally Posted by RedCarpetSchool

As REI Giant said you can only deduct the interest. Anything paid down on the principal is considered income. If that was not the case then everyone out there would pay down there mortgages to hide from paying their taxes.
Now that I think of it I kind of like the idea can we all write Obama and see if he can consider that as a tax shelter. Think about all the problems that may have been avoided if people paid down their mortgages and took advantage of a possible tax break?

But, we're talking about a rental here, right? Not everyone has a rental property to use as a tax shelter, so I think you're going to have to think up another plan to pitch to Obama.

**RedCarpetSchool** · 05-14-2009, 01:42 PM

Every one gets to write of interest payments it would be nice if there was some kind of a tax break for people that wanted to pay down there mortgage rental or not.

Just a thought out load was all.