You now know the effect of owning a rental AND a personal home. Now lets talk about the effect of going from owning a home to owning a rental and how it affects your taxes.
You decide to you want to rent out your current home and you decide to rent, not buy, at the next duty station. Here’s the number’s recap:
- Tax Deduction was – $21,752
- Tax Savings – $2,338
- Rent- $2,700
- Yearly Income – $32,400
Since you no longer are living in your home you lose this $2,338 in tax savings or $21,752 “deduction”. So now (assuming all else stays the same) you will have to increase you tax withholding to cover the difference. So in this example you will have to have another $198.83 come out of your check to make up the difference.
Now lets talk about your house that you turned it into a rental.
Lets assume that your house rents for $2,700 a month. Now you have an income of $32,400. While you can usually show a “book” loss (meaning once you deduct all of the IRS allowable deductions, one can often show a loss, while being cash flow positive) or close to one on your taxes. The unfortunate problem is that you are still going to be affected because the government provides no “credit” for being a renter. The credit goes to the landlord. Therefore you will have to make up this loss as discussed above. PLUS when you do start to make money on your rental, which happens over time, you will have an income that you will have to pay taxes on.
The big “elephant” in the room is the fact we accounted for no maintenance. Things break in houses, so the reality of putting no money in to the house is usually unrealistic. This is especially true depending on the age of the home and the length of time you maintain it. That being said this is still important to take in to account.
Surprises When Doing Your Taxes are NOT fun!
As always this is food for thought. I HIGHLY recommend you get an accountant. A CPA is a professional you want on your side. They understand all of the tax code nuances and are up to date on all of the changes made to the code every year. This article is just to help one understand that their house purchase might be helping them more than they think!
These are all things you want to do BEFORE you make the next PCS decision because otherwise your tax time could need a lot of wine 😉 .
What is your experience? What do you think?0