It may be the end of summer, but with the start of a new school year and a growing economy, the search for the perfect apartment is heating up. Finding the ideal rental in a market like Miami or Manhattan can be tough. When figuring your costs, don’t overlook possible tax savings. Yes, they exist. Here’s what you need to know about potential tax benefits for renters:
1. If you work from home, you may be able to deduct your rent. Normally, you can’t claim rental payments for your home on your taxes – unless you can claim the home office deduction. To qualify, you must use part of your home “exclusively and regularly for your trade or business.” Your home office must be your principal place of business which means a place where you meet or deal with clients or customers in the normal course of business – or a separate structure used in connection with your business (like an art studio). More importantly, it must be a space that is solely used for business (your dining room table which doubles as a desk doesn’t count).
To figure the deduction, total the expenses, like rent and utilities, associated with your home. Next, calculate the percentage of your home used for business. Finally, prorate your expenses: multiply the total expenses by the percentage of business use.
Example: Let’s say that your home office is 100 square feet and your home is 1,000 square feet. Your home office is 10% of your home (100/1,000). If your qualifying expenses are $15,000, your home office deduction is $1,500, or 10% of $15,000.
If that seems too complicated, you can always fall back on the Internal Revenue Service (IRS) simplified method: deduct $5 per square foot of home used for business up to a maximum of 300 square feet. In the example, your deduction would be $500 (100 square feet x $5).
You don’t have to be self-employed to claim the home office deduction. The deduction is also available to employees who work from home. You must still meet the criteria – including that you use the space “exclusively and regularly for your trade or business” but there’s an additional catch: your home office must be for your employer’s convenience. And it should go without saying but you can only claim a deduction for expenses that you pay – if your employer pays the rent, you can’t claim the deduction.
2. Finding the perfect spot may be deductible. If you pay commissions, bonuses, or other fees to get the perfect lease on a property for business use, those amounts are deductible, typically over the term of the lease. If that space is also your home, those same amounts should be deductible as a home office expense (you’ll prorate them just as you would your rent).
3. Protecting your property – or others at your property – may bring a tax break. You can typically deduct premiums that you pay for business-related insurance. This can include errors and omissions insurance; professional malpractice insurance; and general liability insurance, as well as the cost to insure your premises from fire, storm, theft, accident, or similar losses. If the insurance covers specific business-related property (for example, your fancy camera equipment used in your photography business), the entire premium should be deductible. But if your insurance premiums include home and business-related property – like typical renter’s insurance – you’ll need to prorate the cost as part of the home office deduction (see #1).
4. Improving the space that you use for business not only makes it look and function better, it may also be tax advantageous. If you upgrade your home office space for business purposes, you can deduct those costs. Upgrades that are specific to your business space (like a fresh coat of paint or a new built-in bookcase) may be fully and immediately deductible. If, on the other hand, you make improvements that benefit your entire home (like upgrading the electric), you’ll prorate those costs.
5. You can claim unreimbursed losses to your property. You can deduct property losses or the cost of damage to your property from fire, theft, flood or other accidents or natural disasters so long as your insurance provider does not reimburse you. You don’t have to own a home to claim the loss. This is true even if the losses are personal, and not for business. For more on claiming losses, check out this prior article.
6. Real estate taxes are deductible. We typically think of real estate taxes as paid by the owner but that’s not always the case: sometimes costs are passed directly through to the tenant. Check your lease to see if you are paying real estate taxes as part of your rent: if your lease specifically includes the payment of real estate taxes, including responsibility for automatic increases, you may be able to claim a deduction for that part of your rent (be sure to read carefully and not to confuse a bump in rent with a bump in taxes). If you are responsible for paying property taxes directly (more common when you rent a house as opposed to an apartment), you may be able to fully deduct those taxes. This is true even if you don’t use your home for business purposes.
7. Don’t forget state and local tax breaks. While the tendency is to focus on federal tax breaks – since those taxes are a bigger bite of your check – don’t forget about tax breaks for renters on a state or local level. Some of the states which offer tax benefits in the form of credits, deductions, or rebates to renters include California, Connecticut (geared mostly towards seniors), Indiana, Maine, Maryland, Minnesota, New Jersey, and Pennsylvania (geared mostly towards seniors).
Be sure to read the fine print: some – but not all – of these tax benefits are associated with the business use of your home. Some also require you to itemize your deductions on your form 1040 using a Schedule A. If you’re not sure whether you can take advantage of these tax breaks – or don’t know how to claim them on your tax return – check with your tax professional.