Individuals spend most of their income paying housing costs comprised of mortgage or rent payments. Mortgage payments are deductible on tax returns. Individuals can receive tax credits on rent payments in certain circumstances. Some states give tax credits for rent, and business rentals can also qualify.
Tax Credit vs. Tax Deduction
Tax credits provide a direct reduction in your tax liability. These credits are applied to your tax bill, not your taxable income, as is the case with tax deductions. Some states extend tax credits to individuals paying rent, whereas the federal government allows tax deductions for individuals paying rent on business properties.
Some state governments offer tax credits for renters. These programs have been put in place by states such as California and Maryland to reimburse renters for the amount of their rent that is used to pay property taxes. The goal is to give tax relief to the taxpayers who are actually paying the property taxes. The amount of the credit is based on the age and income of the renter.
Individuals can deduct rent paid for the ordinary or necessary course of business. This means that business owners can deduct the rent payments for a building that they use to conduct their business activities. The expense must be ordinary and common to most business owners and it must be necessary for the business to operate. The deduction does not include payments to purchase property.
The Internal Revenue Service (IRS) does not give a federal tax credit to individuals paying rent for personal use. If the space is being rented for both business and personal use, only the business portion can be claimed as a deduction.
- State of California Tax Franchise Board:What is and how do I qualify for the Nonrefundable Renter's Credit?
- Maryland State Department of Assessments and Taxation: Renters' Tax Credits
- Money Crashers: Your Guide to Financial Fitness:What is a Tax Credit vs Tax Deduction – Do You Know the Difference?: Kevin Mercadante
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