What are the tax implications of purchasing an investment property?

This answer was provided by Mark Misselbeck, Levine Katz Nannis & Solomon PC, Needham.

Q: I purchased an investment property this past year and was wondering about the tax implications. Can I deduct the interest and points paid on this mortgage? And do I need to report all of the rent I receive on this property as income even if it does not cover the monthly expenses due on the property? Thanks! --Mary, Boston

A: Since you are collecting rent, even if you bought the property for investment, you must report the rents as income (on page 1 of Sch. E).

You will be able to claim the expenses associated with the rental operation, such as the interest paid on a mortgage (provided all of the funds were used to buy or improve the property [any other use of the funds will require an allocation for the portion of the money used for the property and the balance to whatever the other funds were used for]), repairs, insurance, taxes, utilities, etc. Points on a mortgage must be amortized over the life of the mortgage, except for a mortgage taken out at the purchase to buy your principal residence. You must also allocate the cost of the property between the land and the land improvements (such as building, parking lot, fences, sidewalks, etc.), except for a condominium, which is only the building (the land is owned by the condo association). You will be able to claim depreciation for the land improvements, only (27.5 year life for residential buildings, 39 years for others, and 15 years for parking lots, etc.)

Unless you have another property of this type that generates income that equals or exceeds the loss on this property (assuming it produces a tax loss in the early years), you will be subject to the "Passive Activity" Rules and you will also need to file Forms 8582 and 6251 with your return.