If you rent a home rather than own one, you may be wondering whether you can claim some of those rent payments as deductions on your taxes. After all, property owners can typically deduct expenses like property tax and mortgage interest.
As a residential tenant, you generally cannot deduct your rent from your federal taxes. That being said, if have a home office or rent a property for business, you can usually deduct some rent as a business expense.
There's No Federal Rent Tax Credit or Deduction
Taxpayers who take a standard deduction cannot claim rent payments on their federal tax return.Renters can’t deduct mortgage interest or property taxes on their rental like homeowners, because they do not own the property.
The only exception would be if your lease agreement states that some of your rent goes towards property taxes, in which case you are able to deduct this amount on your personal tax return.
Additionally, some states do offer a tax break for renters. Massachusetts, for example, enables you to deduct up to 50 percent of your rent up to a maximum of $3,000 per year. Indiana, among other states, also enables you to make a similar deduction and some states offer credits rather than deductions from taxable income.
Exceptions for Home Offices and Commercial Rent
If you’re self-employed – and rent dedicated office space or have a home office – then the IRS allows you to deduct all or a portion of your rent if certain criteria are met. The IRS is very clear regarding who may claim deductions of rent payments on taxes.
Self-employment definitely has its perks. Being able to write off some of your business expenses when you go to file taxes, is one of them. While the IRS does not allow you to claim a straight deduction of rent for home offices if you also use a portion for living, you can claim some of your rent or utilities payments if you use a dedicated portion of your home in the course of doing business.
IRS Publication 535, Business Expenses, details the criteria that must be met before you’re able to claim any deductions on rent or leases. For home office use, the IRS states that, “In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business.” But, because you’re likely not using your entire residence as an office, you’re able to deduct only the amount of space you use.
Calculating Your Deduction
A simplified way to determine this amount is to calculate the square footage of the room in which you conduct your business. Next, divide this square footage by the square footage of your entire home. This will give you the percentage of rent you may deduct. For example, if your home office uses 150 square feet of space, and your home's total square footage is 2,000, then you would divide 150 by 2,000 for a total of 7.5 percent. This is the amount of your year's total rent you can deduct for a home office space.
Claiming a home office deduction can be tricky, but to do so, use line 30 on Schedule C of Form 1040. There are many rules and tests the IRS uses to determine if you are able to claim these deductions or not. Consult with an experienced tax adviser, and familiarize yourself with IRS Publication 535 for specific criteria that must be met before deciding to claim a home office deduction.
Dedicated Office Space Deductions
Some of the same rules apply for dedicated office spaces that apply to home offices. The IRS allows businesses to write off expenses incurred during the normal course of conducting business. Having a physical location to store inventory, hold meetings and perform the daily operations of your business is considered one of these expenses.
However, since you will not be using any of this space for living quarters, you’re able to deduct 100 percent of your lease or rent payments because you are using 100 percent of the space for business. Although, there are special rules in place if you pay your lease in advance.
You will need to claim your dedicated office space deduction on line 20b of schedule C or Schedule C-EZ. As with the home office deduction, you should first check to make sure you’re eligible to claim it. Your tax preparer will be able to assist you in selecting which deductions your business is able to claim.
Changes Under 2018 Tax Law
Under tax law changes going into effect in 2018, your federal deduction for state and local income, sales and property taxes is limited to $10,000. If you are deducting a portion of your rent that's explicitly allocated to property tax, this may affect you ability to do so.
If your landlord is deducting a portion of their income for property tax on rental properties, this could also affect their bottom line and, therefore, your rent.
2017 Tax Law and Rental Property
Under the 2017 tax law, there's no cap on the deduction for state and local taxes.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.