This is hopefully a simple problem for someone out there to help me with (apologies if there's another thread on this; the search function never works properly for me).
I bought my house last year in December, so 2016 is the first year I'll be including real estate items on my tax filing forms. I have a basement apartment that I rent to my brother.
As I understand it, I'll need to claim rental income AFTER deductions. However, the deductions are where I'm confused. According to what I've found online, I can pro-rate my mortgage interest, home insurance and property taxes (based on # of bedrooms or sq footage) to reduce the amount of rental income I claim on my taxes. Yet...this doesn't really seem to help, because that pro-rated amount will simply be subtracted from the amount of taxes/interest/insurance I claim to reduce my taxable income from my 9-5 job, right? Seems like a net 0 move. Let me give an example to illustrate my understanding, and hopefully someone can confirm my thoughts or correct my mistake:
Example (fake #'s for simplicity; also I'm not including other deductions like shared utilities, maintenance, etc.):
Interest paid 2016: $6k
Property taxes paid 2016: $2k
Property insurance paid 2016: $1k
Rental income 2016: $8k
Pre-tax income (including rental income) 2016: $100k
Basement and upstairs are equal sq footage and equal # bedrooms, so 50/50
Option 1: Deduct for rental at 50/50 pro-rate
Interest/insurance/taxes deducted for rental: $4500
Interest/insurance/taxes deducted for the rest of home (my residence): $4500
Total deduction from income=$9k, reducing taxable income from $100k to $91k
Option 2: Do not deduct for rental (keeping in mind I will deduct for utilities, etc.)
Interest/insurance/taxes deducted for whole house: $9k
Total deduction from income=$9k, reducing taxable income from $100k to $91k
What am I missing? I doubt I can count the pro-rated amount twice, which would be the only way I can see this helping. Can anyone shed any light on this for me?