How would you handle this?

[Tax Prep by Deb]

I have a client who purchased a five acre parcel that has a home on it.  According to the property bill the land is far more valuable than the home is.  My client is renting out the home at fair market value, but has put a shop on the property (not currently using it for anything) and has intentions of farming (organically) the acreage. 

Currently because of the CA water crises the farm is sort of on hold.  He is tilling the land, but not planting anything because of lack of water.  The renters do have a few animals (he says they are Llamas) and they use some of the land.

How much of the mortgage interest would you deduct as rental expense?  Would you divide it between the house and the property?  Would you then deduct the portion attributed to the rental on schedule E and the remainder on A?  I don't believe schedule F would be used at this point as there is no income being generated and probably won't be for the next year or two.

Any thoughts?

[RitaB]

How much of the mortgage interest would you deduct as rental expense?  Would you divide it between the house and the property?  Would you then deduct the portion attributed to the rental on schedule E and the remainder on A? 

Any thoughts?

Yes, that's what I would do, Deb.  I use the county property tax appraisal to allocate basis, property tax, and interest.  For example, if 2/3 of the total appraisal is assigned to land, I'd allocate 2/3 of those three to land.  I frequently have farmers wanting to write off all their property tax on Sch F.  I think it's called the Whole Ball of Wax Method - House and All.  I look up the county property tax data and allocate the appropriate fraction to farm use.  I think it's as good a way as any most of the time. 

Edited September 19, 2015 by RitaB

[kcjenkins]

I'd only add that if the tenants are using a portion of the land for their livestock, I'd include that portion with the house on the rental expenses.