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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4 Comments Add your own

  • 1. Vitaly Gnatyuk  |  June 7th, 2008 at 4:04 am

    “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. Johnny  |  June 24th, 2008 at 7:57 pm

    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. Murad  |  March 23rd, 2009 at 5:14 am

    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. landlady  |  March 25th, 2009 at 1:12 pm

    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.

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