Am I messing up by not having a mortgage on my rental property??

[Cory Dock]

Hi all,

I am a fairly new investor with 1 long term rental property.  Last year was the first full year it was rented. The property is paid off so I do not have a mortgage on it. Even with some repairs, I was not able to claim a loss on the property last year.


Am I messing up? My w2 income is under 100k, I have been told I can claim up to $25k in rental losses. If that’s the case, should I be looking into pulling the equity out of the house in the form of a mortgage to help generate a paper loss (I would estimate I could get a 100-120k mortgage). Would the loss offset the interest I pay on that mortgage?

I know I should be speaking to a CPA, I haven’t found the right one yet.  The rest of my tax/income situation is very basic. Head of household, standard deduction, sub 100k w2 income. 

Thank you!

[Kevin Sobilo]

@Cory Dock, you don't pay a bank interest to generate a loss.

If you pay a bank $10k in interest you might pay ~$2k less in taxes. That means you have $8k LESS than you would have had without paying that interest!

You pay a bank interest, if you can do something BETTER with the loan proceeds than letting it sit in the property as equity and can generate a return greater than the interest paid. Money in business is made "on the spread" which is the difference between the cost of money and what you can do with it. If you can borrow money at 7% and invest it to make 10% you make 3%.

If you are looking to generate tax breaks, if the property is a more expensive one, you might do a cost segregation study and accelerate the depreciation deduction when you purchase it. This way you have a larger paper deduction during the early years owning the property.