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Posted by Mike C on May 6, 2008, 5:53 pm
Please log in for more thread options > Mike C wrote:
> > I am thinking of buying 2-4 flat that i would live in. Now I receive a
> > substantial itemized deduction for my interest and property taxes on
> > my single family home (which would be sold to buy the rental
> > property). My concern is that I will have to apportion the property
> > taxes and interest between the business (rental property) and my
> > personal deductions, rendering them useless because they will be below
> > the standard deduction.
>
> Your concern is completely unfounded, it is the other way around -- you
> are never worse off, and can often be better off, being able to allocate
> part of your mortgage interest and property tax expense to a rental
> activity. (Not taking into account Schedule A limitations, passive loss
> limitations, AMT, etc -- those are beyond the scope of my reply).
>
> This is because the standard deduction is a *floor* amount: it never
> hurts you, it can only help. If this suddenly makes sense, you can stop
> here, otherwise read on. You may even want to create a spreadsheet and
> plug in some actual values if it still isn't clear.
>
> Here's the math. Let:
>
> * M&PT = total mortgage interest plus property tax
>
> * Alloc = percent personal use (e.g. 25% for 1 unit out of 4, or 100%
> for a owner-occupied personal residence)
>
> * Other = all other Schedule A deductions (income tax, charity, etc)
>
> * StdD = standard deduction ($5,450 for 2008)
>
> Assume for simplicity no other deductions or expenses.
>
> Your question becomes: does Alloc < 100% ever result in a total
> deduction which is less than the one when Alloc = 100%, all other values
> being held the same?
>
> Here is your total deduction:
>
> Max( StdD, (Alloc*M&PT + Other) ) + (1 - Alloc)*M&PT
>
> The first term, Max(...), represents Schedule A, the second term
> represents Schedule E.
>
> Distributing second term within the Max() function,
>
> = Max( StdD + (1 - Alloc)*M&PT,
> (Alloc*M&PT + Other) + (1 - Alloc)*M&PT )
>
> Further simplifying,
>
> = Max( StdD + (1 - Alloc)*M&PT,
> Other + M&PT )
>
> Now, if if Alloc = 100%, this becomes Max(StdD, Other+M&PT), which is
> the typical Schedule A-only situation. As soon as you drop Alloc below
> 100%, the first term in Max(...) can only get larger, and the second
> term remains unchanged, so the result can only be the same or larger.
>
> -Mark Bole
>
> --
> Mark Bole
My point is that if my personal allocated % is below the standard
deduction, I still have to keep that interest and property tax
allocated to personal and it is lost since I am taking the standard
deduction.
Assuming I have no other personal Sched A deductions:
If, for example, I have 25% for personal use, and 25% of int+prop
taxes is less than standard deduction, then I am only getting to use
75% of the int+prop tax to get a deduction.
If, for example, I have 25% for personal use, and 25% of int+prop is
greater than the standard deduction, then it is a different story and
I am getting SOME of that deduction (because I would have gotten the
standard anyway).
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