They calculate it as what is is, and then deduct the mortgage will be if you buy the new property from what your DTI is now.

@Kirsten MiklethunWell, your modified AGI needs to be less than $100k to take the full up to $25k deduction of passive losses.

Every expense/debt service is deducted - mortgage payments, insurance, capex, maintenance, utilities, etc.

Is there any way of treating it as business income, perhaps Schedule C, so that:1. it may be deduct expenses like wire fees, bank charges etc for this income2.

For most people, they are capped at $25,000 net losses to write off on their w2 income.HOWEVER, it sounds like your wife is making a lot of money and the $25,000 net loss deduction is caped and completely disappears with individuals making a modified adjusted gross income (MAGI) of $150,000.

My security deposit return letter would deduct any damages, cleaning and unpaid rent.

The number they sent was AFTER insurance, depreciation, tax, and amortization was deducted.  

Unfortunately, I lose some of the benefits of house hacking since it is 2 mortgages and I need to pay taxes on both units and one side doesn't qualify for the owner occupant deduction for taxes (although the overall numbers still work).

You can take the standard deduct + deduct any business expenses (prop taxes, maintenance, etc.).

I’m guessing it has to do with nuances in accounting methods, cash or accrual, and when the irs let’s you make the deduction.