2 homes, 2 mortgages, 2 much?

Editor's note: This article incorrectly stated the typical depreciation schedule used by investors for a rental property. Under the Modified Accelerated Cost Recovery System, generally the depreciation schedule is 27.5 years for a residential rental property placed into service after 1986.

DEAR BERNICE: My husband and I just relocated from Los Angeles to Arizona. I rented my condominium in Los Angeles and it's currently costing me about $500 per month over what the tenants are paying me. I bought it back in 2002 and still have equity in it, despite the downturn.

We found a really good deal on a house here in Arizona. The challenge is that it's really hard making the payments on both because my husband is still in school. He will be graduating in May and our income will go up then. I'm wondering if it would be smart to sell my condominium in Los Angeles to make it easier for us to make the house payments. --Liz W.

DEAR LIZ: I would strongly recommend that you visit with your tax professional to determine what the "after tax" cost of your Los Angeles condominium really is. You indicated that you are currently paying $500 per month to cover expenses. To determine the real cost of holding your Los Angeles condominium you must take a variety of factors into consideration.

First, are you an employee whose employer deducts your income taxes from your earnings? If this is the case, you may qualify to have less money deducted from your payroll check, as you will now have two sets of deductions: your mortgage interest on your home and possibly the net losses from your condominium as a rental.

Your tax bracket determines the amount of deductions that you can take on your mortgage. Federal law allows you to adjust the number of exemptions you claim. This in turn results in less tax being taken from your income and more net pay for you to cover expenses. (An important point to note is that if you are making a lot of money, you may be subject to the "alternative minimum tax," which can limit this deduction as well as your investment deductions.)

Assuming that the alternative minimum tax is not an issue for you, there are additional deductions that you can claim for your condominium that you could not claim when it was your primary residence. If you haven't started to do so already, be sure to track all expenses associated with your condominium, as most of these are deductible. This includes your mortgage interest, homeowner association dues, utilities, insurance, repairs, plus any other costs that you incur in managing the condominium. This generally includes the cost of any trips that you might take to Los Angeles to rent the condo or to handle other management issues. ...CONTINUED

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