Alternative minimum Tax and mortgage deduction for the second home.
I am a bit confused about this issue. This past year (2005), me and
wife had to pay Alternative Minimum Tax (AMT) for the first time (our
high state and local taxes here in New York City are to blame).
If we were to take a mortgage to buy the second home and rent it out,
would that mortgage be deductible under AMT?
The rent we are going to receive is certainly going to be less than the
mortgage payment. In other words, I don't expect to profit from renting
out this second home/apartment.
Does anyone know the correct answer to this question?
While it is not uncommon to have rental property generating a
loss, if you have no plan to make money on this, your expenses
will be limited. If the property is appreciating faster than your
tax losses and you still generate positive cash flow, that makes
sense. But if this is for a relative to live in, and you charge
below market rent, you might have trouble.
Having said that, for AMT, taxes as you learned that are deducted
on Schedule A are AMT preference items -- not deductible for AMT
but deductible for ordinary tax. But a mortgage used to buy,
build or improve your home is deductible for both AMT and ordinary
income. And mortgage interest and tax on a rental property are
deducted on Scheule E and not Schedule A so do not have the AMT
problems you mentioned.