Owner-occupied rental property gives you access to two different pools of potential tax deductions. The part of the property that you occupy is treated as your house, and you can write off anything that you'd write off on as an itemized deduction on a single-family residence. The rental part is treated as a separate investment property for which you file Schedule E. All that you need to do is to allocate expenses between your unit and the rental unit or units on a pro-rata share.
Mortgage Interest and Property Taxes
Your unit's pro-rata share of the property's mortgage interest and property taxes can be deducted on your Schedule A form. However, if you do not itemize your deductions, you will not be able to claim them. The remaining interest and property taxes get reported on lines 12 and 16 of your Schedule E. You can claim the expenses on your Schedule E regardless of whether or not you itemize your personal deductions.
The Internal Revenue Service lets you deduct everything you spend as an operating expense on your rental units. You can also deduct a pro-rata share of what you spend on the entire property. For instance, if you fixed a broken window in a bedroom in a duplex's rental unit, you'd be able to deduct the entire cost of it. If you pay the water and sewer bill for both units, you'd be able to deduct half of it, since half of the bill is for your personal use and half is an operating expense for the rental unit.
Depreciation lets you claim a portion of the value of your rental unit as an annual deduction. To calculate your depreciation, divide the value of the building, but not the land, by 27.5. Multiply the total annual depreciation by the share of the building dedicated to rental activities to find the allowed annual depreciation that you can write off on Form 4562 and on your Schedule E. For instance, a $400,000 duplex that has a $300,000 building sitting on $100,000 worth of land would have an annual depreciation deduction of $5,455. If you rent out half the building, you can claim half that amount.
Tax Treatment of Sales
Selling an owner-occupied duplex is like selling two separate properties. The half that you live in gets the same tax treatment as any house, including the ability to enjoy up to $500,000, if you are married and filing jointly, of tax-free capital gains. The investment half of your duplex is subject to capital gains taxes and to depreciation recapture taxes.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.