Tax deductions rentals

[Jeff Fairchild]

This article:
http://www.googobits.com/articles/1349-taking-a-tax-deduction-for-home-mortgage-interest.html
says near the bottom of page 1 that you have to live in a vacation home 14 days of the year in order to deduct the mortgage interest.
I didn't know there were any restrictions like this. What about rentals where you aren't living in them at all?

[Jon Holdman]

Close but not exactly. There is a "special allowance" of $25,000 for passive losses. If your AGI is less than $100K, you can take up to the special allowance of passive losses against other income. Over $100K, the amount of the special allowance is reduced by 50% of the amount of AGI over $100K. So, for AGI over $150K, there is no special allowance.

Passive loss is the collected rent - expenses - interest - depreciation. If that calculation is negative (as it often is for crummy rentals), you have a passive loss.

Note that deprecitaion is a two-edge sword. When you sell a rental, you pay depreciation recapture tax on the amount of gain up to the amount of depreciation that was or should have been taken. Your "basis" is reduced each year by the amount of depreciation, so the gain on your sale increases by that amount. Depreciation recapture is currently 25%.