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I hope this hasn't been asked yet; I've heard conflicting opinions on whether the interest on rental property is deductable as is that on your personal residence. If not, since the rents you collect are counted as income and can kick you into a higher bracket, how do us slumlords work this on our Federal taxes? Does depreciation help the cause?
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To tell you the truth, it's come up a lot. However, you report your rental income on Schedule E, and your expenses, like mortgage interest on that property, also on Schedule E. This is to one's advantage if you are in the circumstance where you would do better to take the standard deduction.

It's not an option, Schedule E is where your income and expenses for rental property must all be reported. Depreciation goes there too. This helps in the near term, but may hurt in the long term depending on how rich or poor you are when you sell.
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In addition to what you've already been told, watch out for the passive loss limitations. Because both interest and depreciation are current rental expenses, it's quite possible to have a paper loss on a rental. At certain income levels that loss is restricted on your current return and carried forward until you dispose of the property.

Information about rentals is in IRS Publication 527.

TMF ExRO
Phil Marti
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