Tax Deductions for House Hackers: What to Deduct on Your Owner-Occupied Rental Property 5

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Renting out a portion of the home you own and live in––whether it be one or more units in a multi-family property or rooms in a single-family house––is a great way to jump-start your real estate investing portfolio. Owner-occupying, or house hacking, can help you generate some extra cash or even live for free.


Nicholas Aiola, CPA - Tax Deductions for House Hackers: What to Deduct on Your Owner-Occupied Rental Property - Money House

This photo, “Money House”, is copyright (c) 2013 401(K) 2012 and made available under an Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0) license


If renting out a portion of your personal residence is something you’re currently doing or plan to do, it is extremely important to be aware of the tax implications.




Because the tax treatment deductibility of expenses for your personal residence and for a rental property are very different.


Personal Residence vs. Rental Property

Generally, most expenses paid in relation to your personal residence (e.g., insurance, utilities, electric, internet, HOA, repairs & maintenance, etc.) are not deductible…at all. Not cool. There are some expenses, however, that are deductible on Schedule A (i.e., property taxes and mortgage interest) if, and only if, you itemize…for now.


The same expenses that are disallowed on a personal residence are allowable deductions on Schedule E for a rental property, which means they effectively reduce your taxable rental income. That goes for property taxes and mortgage interest, as well. Cool.


Now that we can see the difference between the two classifications and why it’s important to distinguish between the two, let’s check out the most common deductions and how to apply them to an owner-occupied living situation.


But first, one piece of advice…

Before we dive into the world of Narnia tax deductions for house hackers, let the accountant in me offer an annoying, but very important and useful recommendation:


Nicholas Aiola, CPA - Tax Deductions for House Hackers: What to Deduct on Your Owner-Occupied Rental Property - Important




Sorry…didn’t mean to yell…got a little carried away.


The reason I stress this point is because when tax time rolls around, it’s impossible to remember what you bought at Home Depot for $42.08 on June 15 of last year, and you may miss out on a possible tax deduction simply because you didn’t keep a record of it.


Anyway, where was I?


Oh, yeah, tax deductions…


Tax Deductions for House Hackers

The first step in determining which tax deductions you can take is determining which percentage of the home is occupied by you and which percentage is occupied by the tenant(s). For example:

  • If you own a 4-plex, live in one of the units, and rent out the other three, you occupy 25% and rent out 75% of the property.
  • If you own a 3 bedroom single-family home, live in one room, and rent out the remaining two, you occupy 33% and rent out 67% of the property (this is assuming all other rooms, such as bathrooms, kitchens, living rooms, etc., are all shared equally). You can also use a square footage ratio instead of a room ratio.


Remember – rental expenses are deductible on Schedule E and, generally, personal expenses are nondeductible. Personal expenses that are are deductible are reported on Schedule A. Let’s run through an example with some numbers.


Nicholas Aiola, CPA - Tax Deductions for House Hackers: What to Deduct on Your Owner-Occupied Rental Property - House on Calculator

Shockingly, the home and calculator pictured above are not to scale


Here’s the scenario: You bought a 4-plex for $600,000 and live in one unit, so your personal use is 25% and rental use is 75%. Your total rental income for the year is $54,000 and your annual expenses are as follows:


Expense Annual Total Deductible on Schedule E Deductible on Schedule A Nondeductible
Property taxes $15,000 $11,250 $3,750
Mortgage interest $35,000 $26,250 $8,750
Insurance $1,000 $750 $250
Utilities paid by tenants* $7,000 $7,000
Utilities paid by you for your personal unit $2,500 $2,500
Maintenance and repairs to rental units $3,000 $3,000
Maintenance and repairs to personal unit $500 $500
Maintenance and repairs to “common areas” (used by both you and your tenants) $2,000 $1,500 $500
Other “common area” expenses paid by you (garbage, snow removal, landscaping, etc.) $1,500 $1,125 $375
Depreciation** $13,000 $13,000
Total $80,500 $56,875 $12,500 $11,125

*If utilities were paid by you on behalf of your tenants, they would be fully deductible on Schedule E.

**Depreciation is only allowed on the rental portion of your property but, instead of applying the personal/rental percentages to the depreciation expense, you apply it to the value of the property before computing depreciation. Continuing with the above example: Purchase price = $600,000. Separate the value of the building and land (land is not depreciable) – building = $480,000; land = $120,000. Rental portion of the building (75%) = $360,000. Rental real estate is depreciated over 27.5 years, so the annual depreciation would be roughly $13,000, which is fully deductible on Schedule E. The same concept applies to capital expenditures (e.g., new roof, replace a boiler, major repairs, etc.).


So, what does this all mean?

Now that you read through my nifty table, let’s analyze the numbers…


Gross rents = $54,000

Total rental expenses, before depreciation = $43,875

Net income, before depreciation (cash flow) = $10,125

Depreciation = $13,000

Net loss (no taxable rental income) = $2,875


Allow me to translate…


You cash-flowed $10,125 for the year (which pays for almost all of your nondeductible living expenses). Nice!


And even better, after taking depreciation, you eliminated the taxable income of $10,125 and turned it into a net loss of $2,875. That’s right, you pocketed $10,125, TAX-FREE. Really nice!


Nicholas Aiola, CPA - Tax Deductions for House Hackers: What to Deduct on Your Owner-Occupied Rental Property - Happy Jump

Look how much she loves tax-free money!


Two important things to remember, however…

  1. Rental income and losses are considered passive, which means you may not be able to use all or any of the losses generated from rental activity to offset your other income.
  2. Selling the property could cause some tax problems if proper planning and strategies are not implemented.


The above two topics are outside the scope of this post, but I urge you – please talk to your CPA if either of the above currently or will apply to you and discuss possible strategies to make sure you either pay as little taxes as possible or get the most money back.


Remember, tax evasion is illegal, but tax avoidance is perfectly legal.


The Bottom Line

House hacking is an awesome way to build your rental portfolio, manage properties, and live for cheap (or free). It’s a great strategy, especially for beginners. It’s super important to be aware of the different tax treatments of personal and rental deductions relating to your owner-occupied property because you certainly don’t want to leave any money on the table for Uncle Sam.

As good as the tax deductions may be, keep in mind that there could be certain pitfalls when house hacking. I will dive into this further in a future blog post.


Want to chat about your house hacking adventures? Drop a line below or reach out to me directly! You know where to find me 👇


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Nick Aiola is a CPA located in New York, NY. Nick provides the highest quality of tax and accounting services to a wide range of clients, including individuals, businesses, and fiduciary entities.


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5 thoughts on “Tax Deductions for House Hackers: What to Deduct on Your Owner-Occupied Rental Property

  • Jennifer Bondhus

    I think house hacking is great, but what happens with the depreciation once you stop house hacking and rent out the other portion? How do you now depreciate the portion of the unit you had been house hacking?

    • Nick Aiola Post author

      Jennifer – I believe I just answered your husband’s same question on BiggerPockets (what a coincidence that would be if it weren’t your husband!), but I’ll reiterate here for you 🙂

      When you acquire the property, the full amount of the basis (inclusive of your personal unit) should be capitalized, but the business use % of the asset would be 50%. When you move out, it would then become 100% and depreciation would calculate normally. No additional asset should be added to represent the “new” rental unit since it’s really the same building.

  • Dan Ortiz

    Hey Nick,

    I apologize for the multiple posts, but another few question: when you say “net loss”, is this because you own an asset worth a certain amount that cash flowed $10,125 but that same asset depreciated by $13,000 (more than what you brought in)?

    2) let’s say all else stays the same, but you increase rents next year allowing your net income before depreciation to increase to $20,000. I’m assuming that means you now have a net gain position of $7,000 after depreciation. How do the tax implications work in this case?


    • Nick Aiola Post author


      Great questions!

      1. Not everything is depreciated via the straight line (SL) method. In fact, the only assets that are required to use SL depreciation are the property itself and capital improvements (e.g., a new roof). Other assets are depreciated using either the 200% or 150% declining balance method, both of which are more accelerated than the SL method. Click here for more details.

      2. As far as the net loss goes, that’s strictly from a tax perspective, so the asset worth doesn’t really have much to do with it, aside from the fact that the asset worth determines the depreciation. It’s all about the income and expenses. You’re exactly right – the net loss is generated because the depreciation is higher than the net cash (income) you brought in.

      3. Correct. That would result in a net taxable gain of $7,000, which would be taxed at ordinary rates. However, real estate losses are “passive” and can’t be used to offset nonpassive income (e.g, W-2 income). For the sake of argument, let’s say in Year 1 you have a net loss of $2,875 and no other passive income. That loss would be carried over to Year 2. If, in Year 2, you have a net profit after depreciation of $7,000, you will be able to use the net loss from the prior year to offset some of that income, meaning you’d only be taxed on $4,125 ($7,000 – $2,875).

      Hope this helps!