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.
Posted on Nov 12, 2014


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