ALBUQUERQUE, N.M. — Q: In an earlier column you explained that the new tax law limit on deductions for taxes, which is $10,000 per year, does not apply to property held for investment. The prior question was about undeveloped land held for investment and you said that the property taxes would be deductible without regard to the $10,000 limit. I am concerned about my situation which seems to have better facts. I bought a house that I am renting to my daughter. She is paying me $800 per month rent which I admit is less than the fair value, but it is all that she can afford. I am aware that the tax law says that if I rent to my daughter for less than fair rent then I am considered to have used the house for personal purposes. But my question is whether this means that the property taxes will be subject to the $10,000 limit? Between state income taxes and property taxes on my own home I am already over that limit. It seems from your earlier answer that if the house was vacant and held for investment then I could deduct the taxes? It would seem crazy if renting to my daughter for $800 per month would make the taxes nondeductible.
A: Interesting twist on the facts of the prior column. I think the answer is the crazy one — the property taxes will be subject to the $10,000 limit. This is so even if you bought the property for investment purposes.
To explain this I need to proceed step-by-step through the law. First, beginning in 2018 taxes are limited to an aggregate of $10,000 per year. The law says that this limit excludes taxes on property held for investment or business use.
That was the basis for my earlier answer. Let’s continue assuming that you bought this house as an investment, with your daughter occupying it as her residence at a below-market rent.