Posted in Blog  
  on Nov 12, 2014

Owner Occupied Rental Property

If you have an owner occupied rental property, then you've actually got the chance to use two different sets of tax deductions for your property. For the part of the property that you occupy as the owner, the IRS treats this as your actual residence. You get the ability to write-off expenses and deductions as any other single family residence household would be able to do. For the rental part of the property, it will be treated as a separate investment property and allow you to take business deductions.

It all begins with your ability to keep accurate records. This is especially important if you are paying one mortgage payment for the entire property. Keep your records of payments made, the invoices you have, and any other expenses because you'll be taking out the percentage of the property that you occupy from these business expenses. If you occupy 50% of your property, then the other 50% of the mortgage interest is a business expense, not a personal deduction.



Depreciation Can Be Complicated


Your property depreciates at 1/27.5 every year of the total improvement value, but you claim it in two different ways. If you occupy 50% of your property, then half of your depreciation will go onto your personal return and the other 50% will go onto the business portion of your return. If you occupy an apartment in a large building, that percentage could be lower than 10%. Plan carefully because depreciation like this can get quite complicated – and land never depreciates.

You Must Itemize


In order to claim depreciation, expense deductions, and other items, you must be able to itemize your personal tax returns. If you file the standard short form and take the basic deduction, then you won't be able to claim any of these items on your personal taxes. You'll still need to take the exact percentage that is the business portion off, however, even if you don't itemized personal taxes.

Selling Is Difficult


If you're selling a property that is owner occupied, then part of your property is treated as an investment. The rented portion of the property during a sale is subject to recapture taxes on depreciation and capital gains taxes if you don't go into a new property on an exchange. It's really like selling two different properties in one transaction because the portion that is yours can have up to $500k of tax-free capital gains.



Lower Costs


Most owner occupied rental properties have lower overall maintenance and management costs. Simply put, because an owner is living on the property, they tend to take care of it on their own and manage the property full time. This limits the outgoing expenses that occur and when repairs are made on tenant properties, those expenses become deductible on the business portion of the income.

Although the paperwork can sometimes be extensive with an owner occupied rental property, the financial advantages often outweigh this increase in time spent on documentation. Consider these deductions as you get ready for your next tax season so that you can shield as much of your income as possible.

Related

Most Important Landlord Tenant Laws in Texas

When it comes to having a tenant for the first time, it can be pretty daunting because you are going to be the corresponding landlord and a new relationship will emerge, which will need time to grow... More


The Landlord Tenant Laws in California

The landlord and tenant laws in California are literally the same as they are in any other state. These laws, rules and regulations are put into practice because they uphold an order, a discipline,... More


Understanding the Landlord Tenant Laws in Illinois

People are aware that there are different rulings in each state with reference to the landlord/tenant laws. The state of Illinois also has a set of laws. These rules and regulations are basically... More


The Landlord Tenant Act: What Landlords Need to Know

All landlords know that before they can formally become a landlord there are a lot of things they need to understand. Landlords and tenants cannot act as such without any legal bodies involved. That... More


Essential Tenancy Agreements that a Landlord Should Have

When entering into an agreement with a potential tenant, a landlord needs to fully understand the contract that binds them into the specific relationship of being a landlord and a tenant. Now that the... More


Landlord Rights

If you’re currently considering the option of offering one of your properties for rental purposes, you should first educate yourself about the landlord tenant relationship. For the first timers, it’s... More


Landlord Negligence Claims: What to Do and How to Prevent

Landlords have a lot on their plates, which is quite understandable. It may also be true that you, being a full functional landlord, have done your best but have missed something when it comes to your... More


Holdover Tenancy: What is a Holdover Tenant?

Landlords have many things to think of; they have to deal with legal issues, privacy issues, and so much more. Above all, they sometimes need to deal with a problem tenant. The interesting thing is... More


What is a Tenant Estoppel Certificate?

Most landlords may have some idea what an Estoppel Certificate is. However, many aspiring landlords are still unaware of what this certificate is all about. Basically, a tenant Estoppel Certificate is... More


How to Issue a Tenant Warning Notice

Landlords have a lot of administrative work to do when they have tenants. It seems easy to let people come and live in your home, have them pay the monthly rent and carry out your daily activities.... More