We are thinking of downsizing from the home we currently reside in. We still have about seven years of principal on the mortgage before it is completely paid off. We would like to rent out our home (which we own) for a few years. We understand that each year we can deduct the cost of depreciation as well as other expenses (mortgage interest, property taxes, management fees, repairs, etc).

The yearly deduction from the depreciation alone will likely wipe out any profits from the yearly rental income so that we will not have any gain to report from the rental income.

Can we still use the mortgage interest and property taxes as deductions on our itemized deductions (schedule A) if we do not include it as an expense on the rental income?

Zip Code: 02465

Once you convert your home to rental use, you'll write off the mortgage interest and real estate taxes on a Schedule E, along with any depreciation that you can write off. You will no longer claim the mortgage interest or real estate taxes as an Itemized Deduction on the Schedule A.

Here is a link to the Schedule E: http://www.irs.gov/pub/irs-pdf/f1040se.pdf

To complicate matters further, when you have rental losses, you can only deduct those losses if your total income on your tax return is less than $150k. If your income exceeds that threshold, you'll carry over those losses, and use them to offset future profits, will claim them in years your income dips below $150k, and then will take any remaining losses when you sell the home down the road.

Hope this helps.

Zip Code: 01801