Have a commercial property I make payments on. Can I use the interest as tax savings on my personal income?

Curious G asked:

I have a retail commercial property. It has 3 store fronts and all three are rented out. I was wondering if I can make extra payments from my personal income toward the property’s mortgage and use the interest paid toward lowering my taxable income on my personal income?

Comments (1) Posted in United States

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One Response to 'Have a commercial property I make payments on. Can I use the interest as tax savings on my personal income?'

Randall Parker, MBA - October 12th, 2009 at 8:56 pm
First things first.

You are already paying all of the interest, so any additional payments would be principal reductions, which offer no tax benefit to you.

Unless you are a real estate licensee, your rental business constitutes passive income, and you are limited to a maximum of $3,000 in deductions against earned income. All passive income sources are aggregated, so you can deduct a maximum of $3,000 per year, regardless the number of different businesses or properties or activities that count as passive income.

Additional losses may be carried back up to three years or forward up to seven years, but are lost forever after that.

Paying down principal is probably not in your best financial interest, as it will lower your rate of return on your investments. See a tax planner or financial planner to find ways to maximize your investment returns on an after-tax basis.

I would recommend that you use the extra money to fund a tax-deferred retirement vehicle, rather than reducing principal. If set-up properly, you can use your retirement account as a business partner for your real estate investing and gain a whole host of tax benefits. Again, see a professional in your area.

Good luck to you!