Article written by Logan Allec, a CPA and owner of the personal finance blog Money Done Right.
You probably hear a lot about the great tax benefits that homeowners enjoy, such as the mortgage interest and property tax deductions.
The question arises: as a renter, can you also deduct any of the taxes you pay?
In some cases, you can, and if your residency corresponds to any of the following scenarios, then you will not want to miss these tips.
1. See if your state offers a renter’s tax credit
Did you know that you could get a tax credit on your state income tax return simply for paying rent during the year? It’s true!
However, not every state offers this benefit to renters, and those that do, often ask you to meet certain requirements. For example, to qualify for the California Renter’s Credit, there is an income threshold that you cannot exceed based on your filing status.
Other states may have additional limitations based on household size and the duration of your residency in the state throughout the year.
To see what options are available to you in your state, you should check out your local renters’ association or consult with a tax professional who can give you all the details about your particular state.
2. If you do some freelance work from your apartment, you may qualify for partial rent deduction
These days, it’s not uncommon for many people to pick up some freelance work to make money on the side.
In this case, you may know that you can deduct business-related expenses against your freelance income – for example, the costs related to printing business cards or setting up your website. However, did you know that, potentially, you can deduct a part of your rent as a business expense?
To qualify for this deduction, there must be a delimited space in your living area where you do all of your freelance work in, and it must be used exclusively for your business activity.
For instance, if you rent a 1,000-square-foot apartment for $2,000 per month and you’ve partitioned off a 10-foot by 10-foot area — in other words, 100 square feet — and you use this space only for the freelance work you do, then this is your delimited working space.
Dividing 100 square feet by 1,000 square feet gives us 10%, so you may be able to deduct 10% of your rent as a “home office deduction”. At $2,000 for monthly rent, you’re looking at $24,000 in annual rent and a potential $2,400 tax deduction.
Other expenses you incur may be eligible for this deduction as well, so be sure to check with your tax professional.
3. Renting out rooms could also make you eligible for tax deductions
Subletting is a form of passive income and if your lease agreement allows it, it’s not an uncommon practice. Many tenants decide to rent out a space in their apartment to either long-term or short-term renters for extra cash.
If you’re subletting, you should keep in mind that you have to report all of your rental income on your tax return, but you are also entitled to rental expenses.
To exemplify, you may be living alone in a two-bedroom apartment and you sublet one of the bedrooms to a roommate. Apart from the bedrooms, the two of you share all common areas. In this case, you could be eligible to deduct a portion of your housing expenses such as rent, renters insurance, utilities, and more.
While as a renter you may not have the same tax breaks as a homeowner, you can still be eligible for some deductions. This is why it’s important to stay informed and keep an eye open for such opportunities.