You can sometimes take a tax write-off if you're renting out a house that you pay a mortgage on, but you could also end up having to report income for the rental -- and pay taxes on it. When you're renting out a house, your mortgage payment isn't what matters. It's whether you have a profit or a loss as the Internal Revenue Service defines it.
House vs. Investment
When you own a house, the IRS lets you write off some of the expenses that you have as a part of owning the house. They're considered personal expenses, and you claim them against your personal income. When you turn the house into a rental, it becomes like its own self-contained business. The IRS doesn't look at your income or at your expenses to calculate your tax -- it looks at your bottom-line profit as reported on the Schedule E form. Among other benefits, this means that you can claim your rental expenses as deductions from your rental income, even you don't itemize your personal deductions.
Elements of a Mortgage Payment
Depending on how your mortgage is structured, your monthly payment has anywhere from two to five pieces. The principal part of your mortgage payment, which is where you actually pay back the loan, is never tax-deductible. Your interest payments are deductible as rental expenses. Property taxes also get deducted as rental expenses. Unlike the home you live in, any property insurance payments you make with your mortgage payments are tax deductible, as are any mortgage insurance payments -- whether or not you'd be eligible to do it for yourself.
Income and Expenses
When you determine whether or not you have a loss or a profit on your rental property, you'll be able to deduct more than just the cost of your interest, insurance and taxes. The IRS requires you to enter all of your rental income on the top of your Schedule E form, then lets you deduct all of your expenses. In addition to the deductible part of your mortgage payment, you can also write off management fees, repairs, advertising fees, and even administrative costs, such as any miles you drive to check out the property or the portion of your cell phone bill that corresponds to the time you spend managing the property. You can even write off a piece of the cost of the house as depreciation.
Rental Property Gains and Losses
If you have a profit after you've subtracted all of your expenses from your rental property, you have to pay income tax on it like you do with any other money you earn. If you have a loss, though, you might be able to use it to cancel out other types of income. The IRS allows taxpayers with modified adjusted gross incomes of $100,000 or less to use up to $25,000 of rental real estate losses to offset other income. If you earn $50,000 at work and you lose $5,000 on your property, you end up with a taxable income of $45,000. The rules for claiming these "passive activity losses" can get complicated if you earn more than $100,000 per year or if you have more than $25,000 in losses, though.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.