Income Tax Deductions / 2-Family

For an owner-occupied two-family house (one duplex and one simplex, three floors, with half of the duplex occupied as this is how it was when I bought it), what are the items I can tax deduct from my income tax? Is it the same thing as if it were a single? Also, if you live in a part of Brooklyn where rents are going up, how did you calculate your depreciation deduction so your rental income is offset? Quite simply, what are the items that one can itemize and deduct? Repairs? Gas/Electric? Or none of that since it’s just a two-family? At what point does a repair turn into an operational cost or vice-versa? I’ve had a few different types of responses from accountants, so either I had bad luck or there are more grey areas here than I realized.

soundhoner

in Taxes 8 years and 2 months ago

3

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cmu | 8 years and 2 months ago

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Very straightforward, as resident2 has explained. Technically, you should split real-estate taxes and mortgage interest 1/3-2/3 and deduct from ‘business’ (rental) and personal respectively, though the entire amounts wind up being deductible. I’d expense (per my accountant) small amounts like appliances in the rental. A new window would add to the capital. To add to august’s warning, when you sell, you have two choices: if you buy a “like” property (with a rental,) you can roll over the depreciation etc w/o paying tax. There’s a restrictive timeline to follow (1031 exchange.) If you just sell or buy a place w/o a rental, you have to pay the deferred taxes back to the first building in the chain. Again, straightforward computation.

resident2 | 8 years and 2 months ago

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Keep the proportionate share of the tenants occupied space consistent on all schedules: I don’t know what you mean by 1/2 the duplex is occupied. But for the sake of this exercise I will say, you are occupying 2/3 and the tenant is occupying 1/3. Interest on the mortgage up to $1,000,000 of principal on owner occupied + 1/3 of the tenants portion is tax deductible. 100% of the Real Estate taxes are deductible. 1/3 of the cost of the building is depreciable. (Purchase price + Capital improvements – cost of land taken over 27.5 years. IE: $1,000,000 $36,363.63 per year, if your total basis is $3,000,000. 1/3 of all the building maintenance costs are tax deductible; heat, hot water if included in rent, Insurance, water & sewer, snow shoveling etc. Capital improvements to the tenants apartment (new refrigerator) are added to the depreciation schedule. Paint & cleaning between tenants are deducible as maintenance expenses in the same year. If you fall into the alternative minimum tax category (from your primary income), it is important to file your income and expenses for your tenant on a separate schedule or you will end up paying tax on your tenants rent. If it is filed on a separate schedule, the depreciation, expenses etc. will probably all balance out…..so no tax is due because you made no profit! And no income from your tenant. (Tax free income at its best)

Augustiner | 8 years and 2 months ago

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If it concerns the rental you can fully deduct it. For the rest (eg shared utilities) I would do a percentage according to sqf occupied by you or the rental. Be aware that if you sell the house, only the part you occupy is exempt from capital gains tax up to 500k for married filing together.