Tips on Investment Property
Thinking about getting an investment property? If you plan on using your property exclusively for tenant rental, it must be classified as an investment property. The loans on these properties are made at a higher interest rate and require a higher credit score.
There are a few special requirements for investment property loans:
- You may have to show a lease agreement that confirms the property is occupied by a tenant.
- If the lease agreement gives the tenant the right to purchase the property, it must be secondary to the mortgage.
- If the lease has expired and the tenants are now paying month to month, you have to provide a letter to that effect.
Although this gets a little complex, mortgage interest is one of several rental expenses you can deduct on your taxes. If you use the home for both rental and personal use, you must divide out the space for the purposes of expense determination. You can deduct as rental expenses any tenant room(s) and a part of the shared space that’s proportional to how much of the house is being rented out. Two common methods to base this on are the number of rooms in your home or the square footage.
To clarify this a little bit, let’s take my house as an example. I live in an 1800 square-foot ranch with eight rooms. If we were to rent out a 15 x 15 bedroom (225 square feet), you would deduct that plus 12.5% of any shared space. (225 is 12.5% of 1800).
To save any more complex math, let’s say I rented just the bedroom with no access to elsewhere in the house and I wanted to deduct part of the mortgage interest as a rental expense. If the annual private mortgage insurance payment is $800, you can deduct $100 (12.5% of $800).
That’s all, folks! Hopefully this has helped you understand a little bit more about property classification and home mortgages.
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