Question:
I would like to buy a second home for my in-law in Kentucky. Our principal residence is in Virginia. We plan to collect no rent for this second property but would like to understand if some rent should be collected to increase the possible tax deductions/losses that can be claimed for this property. Our annual income is approximately $180k and my mother has no annual income and is a resident alien.
Answer:
Is your annual income derived as a w-2 salary, or are you in business?
Contrary to common belief, deductions are not a prize to seek. Deductions are not good, deductions make bad things less bad. If you collect rent you will have the privilege of attaching Schedule E on your 1040 form. Increasing your potential for IRS audit 18.5 times. http://www.irs.gov/pub/irs-soi/07db09ex.xls
Some of the deductions you would not be eligible for would be your own time and efforts to repair, maintain, improve or manage the property, since you are not real estate professionals. At your AGI you may start to lose some of your personal deductions through “Phase Out” which would actually increase your taxes.
I am not suggesting that buying a home for your mother to live in is bad, nor am I saying that you should not consider the business side. I AM saying that if you are looking at doing this business you should DO THAT Business as all the most successful businesses do, do it as a Corporation.
Lower taxes, better deductions far fewer audits, easier separate book keeping, etc.
Related posts:
