The owner-occupied duplex tax shelter


I showed a loss of several thousand dollars on my schedule E this year, from expenses related to my duplex – many of which would be nondeductible expenses that I would have as a homeowner. For instance, I was able to deduct:

  • half of my homeowner’s insurance
  • half of my mortgage interest
  • a portion of my cell phone bill
  • half of all repairs/maintenance I did on the exterior of the house
  • half of my water bill, and a portion of my gas bill (since the water heater, for the whole house, is on my gas bill)
  • half of my property taxes
  • most expenses directly related to running/maintaining the duplex — cleaning/maintenance costs, advertising, repairs, etc.
  • my rental license fee

AND

the big one…..

I was able to depreciate half of my house (the rental part). I’m writing off a portion of the value of the house every year (half the original purchase price, spread over 27.5 years), as though it were being “used up” by being rented out — while in fact, it’s appreciating in value.

Depreciation, and the other deductible expenses more than offset the income that I receive from rent, and give me a much bigger tax refund than I would normally get.

Sure, it’s harder than filling out the 1040EZ, but if you can file online, it’s not so hard to figure out.


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17 thoughts on “The owner-occupied duplex tax shelter

  1. “I was able to depreciate half of my house (the rental part). I’m writing off a portion of the value of the house every year (half the original purchase price, spread over 27.5 years), as though it were being “used up” by being rented out — while in fact, it’s appreciating in value. ”

    27.5 years is great, but you can/could make it better. Land improvements (sidewalks, fences, landscaping shrubbery, septic systems, water pipes) – 15 years, Computers and peripherals – 5 years, Typewriters, adding machines, copiers – 5 years, Automobiles and trucks under 13,000 lbs. – 5 years, Office furniture (desks, chairs, file cabinets, etc.) – 7 years,

    These Items can be depreciated much quicker and save hundreds or thousands on your taxes. Search the irs website for more info.

  2. I love your site. I’m thinking about buying a duplex in the coming months and this seems to be one of the best resources out there. As for tax deductions, what are the rules for applying a loss on your rental property as a tax deduction on your personal income?

  3. Thanks for your post. I was wondering if you have further thoughts on a couple of questions I had:

    – you mention that you were able to take deductions on the rental unit that you normally wouldn\’t be able to. But then you include mortgage interest. Isn\’t that wholely deductable as a home owner? In fact, is there a benefit in showing a loss on schedule E? ( wouldn\’t only need to offset the rental income? ). Why not deduct the mortgage interest in its entirety as a home owner ( not a rental expense )?

    – I think normally if you sell a house and make a profit, then apply that profit to the purchase of a new house, some of that profit is not taxable ( I think 500K or so ). Do you know if this is also true for a duplex if you have been renting part of it?

  4. Murad — mortgage interest is deductible for any homeowner who itemizes. However, by including half of the mortgage interest for a duplex as a rental expense, along with other items (expenses, depreciation, etc.), you’re able to show a LOSS on your schedule E. And yes, you do want to be able to show a loss — this offsets your income for the year.

    Deducting the duplex mortgage interest in its entirety as a homeowner, instead of a rental expense, would be simply “doing it wrong.” If you go to a tax accountant, they’ll split everything down the middle in order to file your taxes properly. Of course, if your duplex is set up such that one unit is much larger than the other, then perhaps two-thirds is a rental expense, while one-third goes on your schedule A.

    I’m not selling my duplex any time soon, but yes, it is my understanding that if you live in a duplex before selling, you get the same tax benefit on the profits that you would if it was a single-family home.

    Again, I’m not an accountant, so definitely check with an accountant or tax professional before filing anything or making any big decisions.

  5. Thanks for a great post. The discussion of owner-occupied multifamily tax strategy is hard to come by. I have tried to develop my own plan by scouring the IRS website (extremely time-consuming). I think that two issues should probably be clarified here:

    (1) “And yes, you do want to be able to show a loss — this offsets your income for the year.”

    On the Schedule E, the losses sustained from depreciation, mortgage interest, and other rental costs outlined in the post offset RENTAL income. Unlike the mortgage tax deduction that you get for your personal unit, this does not directly offset annual income generated outside of the property itself (from your job). If you treat them in the same way, you are certainly “doing it wrong.”

    With that said, if your annual rental income turns out to be a loss, then this can offset other income just like any other investment loss. However, there is an annual cap on these losses. If, for example, you have a very expensive year due to major repairs or other costs, I believe that losses above that cap can roll over to offset the next year’s income. So keep track of them.

    (2) “I’m not selling my duplex any time soon, but yes, it is my understanding that if you live in a duplex before selling, you get the same tax benefit on the profits that you would if it was a single-family home.”

    From what I have read, you will be entitled to the capital gains exemption ($250,000 if single or filing separately, $500,000 if married) for your PERSONAL unit. That is, the unit that you have resided in for at least 2 of that past 5 years. Capital gains associated with the other unit will be fully taxed. So any appreciation in the value of your rental unit (50% of total gains) will be taxed upon resale, minus the cost of capital improvements that you make (ie new roof, new windows, new kitchen, etc). So KEEP TRACK of the cost of capital improvements made to the rental unit (or 1/2 of the improvements made to the entire property).

    I have a call into the IRS to make positively sure that this is the case — I am currently about 85% sure.

  6. Great! I both a duplex 4 months ago and really had a lot of questions in re-taxing, so i am really glad that I got this property!!Thank you!I need more articles like this, Please!:)

  7. Finally the information I was looking for. Just to clarify, is it my understanding that for a owner occupied, I just split the cost basis down the middle and depreciate that as normal (27.5 yrs) for my rental unit?

  8. Hi Peter. Yes, unless the property is somehow unevenly split, in which case you might be depreciating 2/3, 3/4, 1/4 etc. depending on how much space the rental unit takes up compared to the portion that is your residence.

  9. Thanks for that information. One more, are you using the original purchase price for the cost basis plus certain settlement costs, or Fair market value or assessed value. If one of the last two how are you figuring that out? Are you taking off for the land under the house?

  10. I can’t even tell you how cool it was to find this site after being buried in IRS forms and documents!

    I’m attempting to do my own taxes after buying a triplex of which I live in part of. The triplex consists of a duplex in front (each unit being 620 sq. ft.) and a mini house in the back (580 sq. ft. plus an attached garage that can fit 1 and 1/2 cars). There was one month that we collected rent from tenants in the back before they moved out. They were using the garage during that month. There are a few bills (i.e. getting the whole place termited) that we can deduct from all three units. I’m aware that I can only deduct one month’s worth of it from the back house as a rental expense. My question is, in trying to divide up the bill into 3, do I count the garage in my percentage calculations or do I just count the livable space? Any help is much appreciated!

  11. After treating rental unit separately – you’d be normally left with 1/2 of interest and 1/2 of property taxes to deduct on Sch A.

    If you file electronically – doesn’t IRS match 1099-INT amounts to those reported by lenders? If you show just 1/2 of interest – wouldn’t it trigger a mismatch and ELECTRONIC filing being REJECTED by IRS?

    Has anybody actually tried to file something like that ELECTRONICALLY? Was it accepted? Thanks!

  12. Does anyone know about whether it’s kosher to take the home office deduction for owner-occuiped duplexes/triplexes?

  13. @Summer
    As far as allocating expenses on Schedule E and depreciation, I use Pub 527, p16 as my reference on “how to divide expenses”. It says “use any reasonable method for dividing the expense”, and I am quite lenient in what I consider reasonable.
    My duplex has 3 livable floors. I live on 2 as a single person and rent the 1 floor out to a couple. I could base it on livable space and only deduct 1/3 but that’s not fair to me since there are two of them using twice as much water and other services. So I just split it down the middle and deduct 1/2. If I had 3 units and I lived in 1, I would deduct 2/3rds. I suppose the IRS could disagree with this leniency if I ever got audited, but it’s certainly up to debate, and I’d rather err in my favor than theirs in this case.
    So to answer your question on the bills, I would deduct 2/3rds as rental expenses based on you having 2 out of 3 units as rentals. The square footage on all 3 is about the same anyway. However, if you are the only one using the garage and do work on it, then that would be personal. To get around that though just simply let them store stuff in it. Then it’s being used by everyone and deductible.

  14. Just bought a 3plex and live in one of the units with all three units about 500 sqft each. My question is more on a personal opinion side of how do should I pay for utilities and bills since some will be 2/3rd business and 1/3 personal?

    I have my own personal bank account and opened another account for business.

  15. I have a duplex, where our unit is about twice the size of the rental unit (I will deduct 1/3 on most things – insurance, property tax, depreciation, etc).

    We share water, electricity, and gas utilities. If I have repair or maintenance work done on the gas furnace, which is in my basement, can I deduct 1/3 of the cost? Can I deduct 1/3 of the cost to insulate the pipes in my basement, to keep the heat costs down?

    I had a locksmith install locks on two different doors, to allow the tenant basement access (per building inspector, so tenant may turn off utilities, in an emergency). Can I deduct 100% of the cost of the locksmith bill?

    I had our property converted from a single family with in-law to a two family. Are the costs associated with the conversion deductible (i.e. fee to the town to have our case heard before zoning board, advertisement in paper to alert town of meeting, conversion fee, etc.)?

    Thank you for this message board!

    —-John

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