Divorcing or separating usually means big tax changes. Your filing status may change, and however you divide up your assets and income will affect your taxes. Renting to your wife may alter your tax bill, but it's more likely to reduce your available deductions than to give you a tax write-off.
If you rent a property to your wife who you're separated from, you can take a deduction or loss on your taxes as long as certain criteria are met and she is paying fair market value for its use.
Exploring Personal Use
When you own rental property, you get to write off pretty much all your expenses. If you make personal use of a rental house or apartment, however, you give up some of the write off. For example, if you take a month of personal use, you get to deduct 11 months' worth of property taxes, mortgage interest, repairs, depreciation and so on. The expenses for the other month are personal and mostly non-deductible.
Defining Fair Value
Personal use isn't just about the times you hang out at the house. If you let friends or family, including your wife, stay at property you own for free, that's personal time too. If your wife pays the same rate a stranger would pay, it's business and you can take the usual deductions. Letting her rent the house at below the going rate counts as personal time, so you don't get any rental write-offs while she's there.
Important Alimony Considerations
If you pay your wife any sort of living allowance under a written separation agreement, you do get a tax deduction. Letting your spouse rent a house you live in doesn't qualify, though. Because it's your property, you'd have to pay the repair, tax and other bills anyway, so you can't count them as alimony. Non-cash payments, such as free lodging, don't get you the write-off. If you pay the utilities, you can write those off.
Other Valuable Deductions
If you can't take a rental write-off for your property, you can still deduct property taxes and mortgage interest on it. You have to meet all the IRS requirements, and claim the expenses as itemized deductions on Schedule A. If you pay your spouse's utilities, you claim that as a deduction on Form 1040 even if you don't itemize. That only works, though, if you're required to do it under a written agreement, not if you're just being generous.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.