6 Tips for Maximizing ADU or Rental Property Tax Deductions

Rental Property Tax Deductions Require Separate Spaces

Whether you’re thinking about renting out a portion of your home or building and renting out an ADU, you must have a full division between your space and your tenant’s to claim rental property tax deductions, according to Evan Liddiard, CPA, director of federal tax policy at the National Association of REALTORS®. If the tenant uses the rented space exclusively, you can allocate the expenses — including depreciation, utilities, and property taxes — between the rental and nonrental areas in the house.

Here’s how it works. “You can’t spend time in the same space as your tenant and call it a rental unit,” Liddiard explains. “In other words, if someone moves into a room in your house and shares your kitchen, you have a roommate or a guest as opposed to a tenant. On the other hand, if the tenant moves into your basement, where there is a kitchen and bathroom, and you leave them alone and they leave you alone, you can apportion your home between the rental and nonrental portions. That is important for tax purposes: The rental unit must be used exclusively by the renter and not by the owner.”

Contact your Tax Professional for more information.