We have been trying to sell our house for about 6 months. Since we can't sell it, we found a tenant who will move into effective 1/1/08. Since we had to pay our mortgage on an empty house for 6 months, can we claim that as any type of loss with our taxes?

Also, our rent will not cover the mortgage. So for 2008, can we claim the diff. btwn the rent and mortgage as a loss?

If the house is considered commercial or investment property, then yess you can claim your expenses (mortgage, interest etc) to offset income.

Can we just call it "investment property"? It was our primary residence until we bought our new house.

Yes, once it no longer was your primary residence and especially after you signed your first lease for it, it became commercial property. You should be filling out a Schedule C where the expenses of this property would be listed against the income. If there is a loss, that loss comes off your tax liability.

Scott:

You are over-stepping your level of expertise here. Rental property is reported on Schedule E, not Schedule C.

Laudel:

You CAN claim the mortgage AND other costs, such as depreciation, if you are considering converting the house to a rental property permanently. But there are consequences to such a decision.

There are too many issues to properly address on this forum. Send me an email with your phone number and we can discuss it in detail.

1. Rental property is a passive activity subject to at risk rules. So your loss deduction is limited. You will report it on schedule E (form 1040).
You can use schedule C only if you are in the business of rental properties (or renting the properties).

2. Also for the period you changed property from dwelling unit to rental unit, you must deduct depreciation. You will need depreciation details when you sell the property.

Scott:

You are over-stepping your level of expertise here. Rental property is reported on Schedule E, not Schedule C.


Which is why I moved this to the tax forum from where it was originally posted ;). I wanted to make sure you guys would correct me if I was wrong. Thanks.

MukatA's points are accurate, though the income limitations probably do not apply.

Scott:

No one knows everything. The wise man knows this; the fool does NOT! :-)

When did the IRS start allowing you to deduct the mortgage on rental property? I always thought it was the interest on the mortgage that you could deduct.

Yes, it IS the mortgage interest!

Okay, so my terminology was not that precise! Sue me!

It's okay ATE. We still love you. You would have called it on us too.
If laudel had been actively trying to rent the house for the last six months of 2007, then interest, taxes, depreciation, repairs, etc. could have been deducted on Sch E even if the rental property did not produce an income. But because they had it listed as for sale, then the interest and taxes may deducted as a second home on Sch A if they itemize. AND if you sell the house in the next couple of years, then the capital gain will be exempt as long as you lived in the house 2 out of five years. Exp: You lived there for 2 years, house was empty for 6 months, you rented it out for 2-1/2 years then sold the house. It would still qualify for exemption.

I need to clarify the first home. The interest and taxes get deducted for the first six months as your primary residense on Sch A and the interest and taxes get deducted on the last six months as second home on Sch A. So the interest and taxes need to be divided up and put on two separate lines on Sch A. The interest and taxes that you pay on the new home will also be listed on the line as primary home on Sch A.

Mobea's statements are accurate and timely.

Let me add that you need to be careful about renting the house while trying to sell it.

You CAN do this and still retain the right to NOT pay capital gains taxes on the sale (homeownwe's exemption), but only up to a point. Generally, the IRS will allow you to rent the house for at least a year and maybe two (if sales consditions have caused the house to remain unsold), but beyond that, they will question your attempt to claim the homeowner's exemption.

You should NOT depreciate the house if you intend to claim the exemption. Once you depreciate the house on a tax return, you effectively forfeit any right to claim the homeowner's exemption.