Author Topic: Owner-occupied two-unit: itemize v. standard deductions  (Read 900 times)

mrteacher

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Owner-occupied two-unit: itemize v. standard deductions
« on: April 03, 2018, 04:48:16 PM »
I'd appreciate some advice on landlord tax deductions/standard deduction.

My wife and I will be closing soon on a two-family. We will be living on one side and renting out the other.

In my research I've found that many of the expenses associated with renting half of our property are tax deductible; however, I think it is still unlikely that we will itemize. Even with depreciation, taxes, mortgage interest, repairs, tools for repairs, etc, I don't think we will spend - and thereby be able to deduct - more than the MFJ standard deduction of $24,000 in 2018.

I'm not sure that I have a pointed question...I'm more just looking for discussion around the itemize v. standard deduction. Are many people - even those who landlord - in the situation where the standard deduction is greater that itemizing?

Thanks!

tralfamadorian

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #1 on: April 03, 2018, 05:37:03 PM »
In my research I've found that many of the expenses associated with renting half of our property are tax deductible; however, I think it is still unlikely that we will itemize. Even with depreciation, taxes, mortgage interest, repairs, tools for repairs, etc, I don't think we will spend - and thereby be able to deduct - more than the MFJ standard deduction of $24,000 in 2018.

The depreciation, taxes, mortgage interest, etc associated with the rented half of the property would be deductible against your rental income as a business expense on your schedule E- it's not part of the standard deduction vs itemization decision. 

mrteacher

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #2 on: April 03, 2018, 06:03:00 PM »
In my research I've found that many of the expenses associated with renting half of our property are tax deductible; however, I think it is still unlikely that we will itemize. Even with depreciation, taxes, mortgage interest, repairs, tools for repairs, etc, I don't think we will spend - and thereby be able to deduct - more than the MFJ standard deduction of $24,000 in 2018.

The depreciation, taxes, mortgage interest, etc associated with the rented half of the property would be deductible against your rental income as a business expense on your schedule E- it's not part of the standard deduction vs itemization decision.

Woops! I'm feeling foolish for not knowing that, but I'm sure glad I asked! That makes a lot of sense!

tralfamadorian

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #3 on: April 04, 2018, 06:56:20 AM »
Itís nothing to feel foolish about! Itís a complicated corner of the tax code. If you google around a bit, youíll find some examples of how to determine if an expense is 50% deductible or wholly.

mrteacher

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #4 on: April 04, 2018, 11:37:01 AM »
It is complicated! I've been doing lots of reading and trying to figure everything out.

So to make sure I have this straight: I'll pay taxes on whatever is left after I subtract interest, taxes, depreciation, repairs, etc from the gross rental income?

tralfamadorian

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #5 on: April 04, 2018, 11:58:43 AM »
It is complicated! I've been doing lots of reading and trying to figure everything out.

So to make sure I have this straight: I'll pay taxes on whatever is left after I subtract interest, taxes, depreciation, repairs, etc from the gross rental income?

Okay, let's make up some numbers:

Your total bills for the duplex (both sides) this year-
Taxes: $2000
Insurance: $1000
Depreciation (calculated on 50% purchase price): $1000
Repair driveway which both units use jointly: $1500
Repair fridge on your side: $50
Replace bathroom faucet on rented side: $100

Amount you can count as an expense on your Schedule E:
Taxes: $1000
Insurance: $500
Depreciation: $1000
Driveway: $750
Fridge: $0
Faucet: $100

Items that affect both side evenly can be deducted at 50%. Items that affect your side only cannot be deducted. Items that affect the rented side only can be deducted 100%.

mrteacher

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #6 on: April 04, 2018, 03:36:15 PM »
It is complicated! I've been doing lots of reading and trying to figure everything out.

So to make sure I have this straight: I'll pay taxes on whatever is left after I subtract interest, taxes, depreciation, repairs, etc from the gross rental income?

Okay, let's make up some numbers:

Your total bills for the duplex (both sides) this year-
Taxes: $2000
Insurance: $1000
Depreciation (calculated on 50% purchase price): $1000
Repair driveway which both units use jointly: $1500
Repair fridge on your side: $50
Replace bathroom faucet on rented side: $100

Amount you can count as an expense on your Schedule E:
Taxes: $1000
Insurance: $500
Depreciation: $1000
Driveway: $750
Fridge: $0
Faucet: $100

Items that affect both side evenly can be deducted at 50%. Items that affect your side only cannot be deducted. Items that affect the rented side only can be deducted 100%.

So - just to make the numbers easy - if we were renting for $1,000/month we would subtract all those expenses $3,350 from $12,000. We would then owe income taxes on the difference: $8,650.

Correct?

tralfamadorian

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #7 on: April 04, 2018, 04:28:23 PM »
So - just to make the numbers easy - if we were renting for $1,000/month we would subtract all those expenses $3,350 from $12,000. We would then owe income taxes on the difference: $8,650.

Correct?

Exactly. And I didn't include it in the numbers but you would also have 50% of your mortgage interest.

This is also presuming that the each unit is similar in size. If they are different, then it is standard to split the expenses by either the square footage or number of rooms. So, it you move into the four bedroom unit, which is 2000 sq ft, and the rented side is two bedrooms, which is 1000 sq ft, then the deductible % would go from 50% to 33%. 

Sibley

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #8 on: April 06, 2018, 01:07:57 PM »
My parents have this situation. It's a pain honestly, but they have the added complication of a home office in their half which makes any allocations impossible so I have to calculate and force the program every year.

Mortgage interest, property taxes, and any costs that are applicable to the whole property (insurance, repairs etc) are split between the Sch E (rental) and if applicable, Sch A (itemized deductions). Expenses specific to the rental are only deducted on Sch E. IE, repairs in the rental unit, advertising, any permits/inspections/fees you may have to pay locally because of the rental, etc.

You can also depreciate the rental, which makes selling the property more complicated. I don't know how to handle that, which is why the year that my parents sell the house they'll be paying someone to do their taxes rather than me doing them!

Keep in mind with the tax law changes that were passed and signed last December, the standard deduction was doubled, plus the SALT deduction was limited. So the chances that you'll be itemizing just went WAY down, regardless if you own or not. Which does make some things easier honestly, but you still need to do the math.

Another tax wrinkle is the passive vs active classification. Typically, I believe rentals count as passive activities, so you can't deduct losses the same way. In my parent's case, they meet whatever standard it is so they can classify it as active. Since with depreciation they usually have a loss, that actually decreases their AGI. Definitely look up that piece, because if you can get the same deal it's very nice.

SimplyFinanciallyFree

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Re: Owner-occupied two-unit: itemize v. standard deductions
« Reply #9 on: April 09, 2018, 08:09:39 AM »
Definitely track your expenses as they will offset your rental income.  We have an owner occupied duplex and despite our gross rental income coming in around $16,680 our net taxable income after expenses, depreciation, mortgage, insurance etc is only a couple thousand per year.  Things like trash removal, water/sewer, snow removal and anything that we do on the exterior of our property is 50% deductible (the % is based on what % of the building is rented so this assumes the units are about the same size).  We do use an accountant to make sure things are done correctly but I would keep receipts and create a spreadsheet or other system to track everything.