Yearning for some more deductions? Don't worry, we may find something for you.
When you borrow money, such as on a mortgage, it isn't considered income. And when you repay, it isn't considered expense. Instead, your tax consequences from borrowing are determined by the use of the funds from borrowing. For example, if you're a business that borrows to pay business expenses, then those expenses are deductible when paid from the proceeds of the borrowing.
When you repay the loan, you have no further tax consequence. If you fail to repay the loan, then you have forgiveness of debt income. It kind of makes sense that if you don't repay the loan that you used to claim deductions, then you shouldn't be allowed to have claimed the deductions. Therefore you must recognize income from the forgiven loan.
The mortgage you borrowed on to buy the rental property forms part of the cost of your property. Your property is depreciable for tax purposes. Hence your principal payments on the loan are recovered by claiming depreciation on the property.
For example, assume you buy a condo for $275,000, which you finance 100 percent by a mortgage on the property with a lender (those kinds of lenders don't exist anymore). Residential rental property is depreciated over 27.5 years, so that means you get to claim $10,000 in depreciation per year that you own the property. The $10,000 in depreciation plus the interest you pay probably yields a greater tax break than a deduction for the principal repayment, so you're ahead. That should satisfy your tax-deduction desires.
Ask the adviser
To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.