Tax Write Offs For House Hackers

Mark Perlberg:

Mark Perlberg, CPA, here to talk to you about what can you write off as a house hacker. A house hacker is someone who either lives in a room or a unit and rents out the other rooms or unit in the property that they live in. First thing I want you guys, you house hackers, to think about is if is you’re house hacking, a lot of house hackers, their other sources of income are their W-2 jobs. So when you get that first property, this is your first time being a business owner. So if you are now a business owner, we finally have the opportunity to create write-offs, whether those be business meals, business travel, educational resources and supplies. We have all these opportunities to create write-offs because we are now in business of renting out either a room or a unit in a property that we live in.

Now let’s talk about identifying what portion of this property is business and what portion is personal. If you have a roommate, we don’t get to write off a whole lot of stuff in that property because anything that we share, so if we share a bathroom, a kitchen, living room, anything that we share with anyone else is not business property. So if we have to update that bathroom, put a new couch in that kitchen, any of those items are not going to be tax deductible events because we have personal usage for them.

However, if we have a bedroom that we rent out to other people, that is business purpose. And any updates to that bedroom that we rent out for other people, any repairs and maintenance might be capitalized or might be expensed. Now let’s look at if you have a unit and rent out other units. Obviously any of those units that you’re renting out to anybody else, any direct expenses on those units can be either capitalized and depreciated or expense depending on a variety of factors.

But regardless, any expenditures into those units that you don’t live in and rent out are going to be tax deductible events. Now let’s talk about shared costs and overhead. So this might be the property taxes, maybe the electric bill, maybe the cost for the trash and water or anything else like that, that you may be paying on this property.

What we’re going to do here is now that we’ve identified what portion of your property is business and what portion of your property is personal, the proportion by which we’ve defined as business usage will determine what percentage of these overhead costs are deductible. So to give you an example, let’s say you live in a two unit property and each unit is 500 square feet. Keeping it simple. You have $100 of a water bill and you want to determine what portion of that is deductible.

Well, because 50% of that duplex is business purpose, we will write off 50% of the water bill. What gets interesting is if we have mortgage interest and local taxes because a portion of that can be used to offset your rental income and a portion of that might go on your schedule A as an itemized deduction. A portion of it might even be allocated to your home office in the unit that you live in if you have a home office.

So what we want to consider here is for you as the taxpayer is you want to determine what portion of that property is dedicated to business, and that will help us allocate your general overhead. Now, we want to track things like maybe your internet, if you have roommates or maybe even if you share the internet with the other tenants. We can now start tracking our general costs to maintain this property because a portion of it will now be tax deductible.

And again, any direct costs that are directly related to a fully dedicated business portion of your property, for instance, a unit that is designated for renting or a bedroom that is designated for a roommate, any expenses related to that, we can write off right away or at least capitalize and depreciate. Another write off that’s available and you as a client don’t need to know this if you have a good tax advisor, but we are also going to depreciate a portion of that property as well. So a portion of that property will depreciate most likely over 27.5 years. And again, we will look at those same allocations to determine what portion of your property will depreciate. Hope this helps some of you house hackers out there and provides some clarity. Feel free to reach out if you have any other questions.