Tax Deductions for Your Owner-Occupied Rental Property

As a homeowner, you are entitled to legal tax deductions. These are home-related expenses that can be deducted from your taxable income, and which you can expect to get back in your tax returns.

If you are a homeowner, you are typically entitled to the following tax deductions:

• home mortgage interest payments
• real estate taxes
• mortgage points

You may also have the following additional home expenses written off:

• cost of refinancing your home
• accidental loss
• home office costs
• annual property taxes
• mortgage interest and property taxes from second homes or vacation homes
• moving costs

Filing your home tax deductions, however, may get a bit tricky. There’s a fine line between common home expenses that could easily confuse a homeowner filing for deductions.

Here are some of the most common home-related expenses that cannot be deducted from your taxable income:

• fire, flood, or homeowners insurance payments
• amounts paid to reduce your mortgage principal
• general home improvement and/or maintenance costs
• mortgage insurance premium payments
• home energy savings

But what if you live in a home that you also rent out? In this case, you might be able to take advantage of two separate segments of tax write-offs.

For starters, you will also receive deductions on the home that you use as your primary residence. And secondly, the unit/s that you are renting out is/are treated as separate investment properties for which you will need to file a Schedule E.

You would need to allocate your expenses between your unit and the rental unit/s on a pro-rata share.

Being a landlord in a home you also occupy yourself, here are the possible write-offs you can deduct from your taxable income.

Mortgage interest, property taxes

You can deduct your unit’s pro-rata share of the home’s property taxes and mortgage interest from your Schedule A form. You will need to itemize your deductions to be able to get them. You can report the remaining interest and property taxes on lines 12 and 16 of your Schedule E. Even if you do not itemize your personal deductions, however, you will still be able to get the expenses on your Schedule E.

Cost of operation

You can write off everything you spend on your rental units or a pro-rata share of expenses spent on the entire property. Let’s say you needed to repair flooring in one of your rental units. In this case, you can write off the entire expense. If, however, you spend repairs for something that you and your renters both benefit from, such as electricity or water costs, you may be able to deduct half of the cost as operating expense.

Depreciation cost

You can claim a part of the value of your rental as an annual deduction. To calculate depreciation:

(value of the building (not the land)/27.5) X share of the building dedicate to rental activities

Place this amount on Form 4562 as well as on your Schedule E.

On selling owner-occupied property

If ever you decide to sell the property that you are living in and renting out, the part of the home that you use as your primary residence will be treated similarly as any other residential property unit being old in terms of taxes, including the potential of enjoying up to $500,000 of tax-free gains in case of married individuals or those who are filing jointly.

Meanwhile, the portion of the home that you’re renting out will be subject to capital gains taxes as well as to depreciation recapture taxes.