How Can I Deduct Rent Paid on an Apartment?

Answer

In most cases, the amount of rent paid on an apartment is not eligible for a tax deduction, in contrast to the mortgage interest paid by homeowners. If, on the other hand, you operate a home-based company from your apartment, you may be eligible to deduct a portion of the rent from your earnings in the business. To be eligible to deduct the expenses of renting a space for your company, you will need to meet a number of conditions first.

Tip

On the Schedule C of your Form 1040, you have the option to deduct the rent for the portion of your apartment that you use as a home office or as rented space.

Qualifying for Home Office Deduction

If you conduct your company out of your apartment, you may be eligible to take a deduction for a portion of your monthly rent. It is essential that the office have a distinct location that is routinely and only used for business purposes. This criteria may be met if the space is utilised in any one of the following ways: as a place where you meet with clients; as a place to store product samples or inventory; or as a place that is used as a childcare facility. It is also possible for it to fulfil the essential conditions for a business space if your company operates as a distinct organisation and sublets the space from you, or if you rent or sublet the space to visitors for more than 14 days per year.

Using the Regular Method

The size of the dedicated area is directly related to the amount of the rent deduction that may be taken. When determining how much of your rent should be deducted, you have the option of using either the standard technique or the simplified way. In order to use the normal approach, you are required to maintain precise records that demonstrate the real costs you incurred in relation to the deductible area. In order to use this strategy, you will need to split the overall size of the flat by the area of the deductible space. After that, the deduction factor that was determined is applied to your rent and any other costs that you have, such as your utility bills.

For instance, if your apartment is 1,600 square feet and you dedicate 400 square feet to your company, the percentage of your flat’s square footage that you may deduct from your rent is 400/1600, which is equal to 25 percent. If your rent is $3,000 per month, the yearly deduction for rent would be 0.25 times $3,000 times 12, which would be $9,000. To determine the total amount that you are eligible to deduct for the year, you will need to apply the same calculation on the other expenditures that are shared with the rest of the flat, such as your energy bill.

Using the Simplified Method

You may use the simple way to rapidly compute your home office deduction if you’d rather not keep the extensive records that are necessary for the normal technique. This option is available to you even if you choose to utilise the regular method. In order to calculate your yearly home office deduction using this approach, you will need to multiply the total number of square feet occupied by the company space (up to a maximum of 300 square feet) by the rate of $5 per square foot. This strategy allows for a maximum yearly deduction of $1,500, which includes a write-off for any and all costs associated with operating a home office.

Operating a Rental Business

The so-called “gig economy” has resulted in the proliferation of house rental platforms such as Airbnb, FlipKey, and VRBO, amongst others. If you pay taxes on the money you make by renting out a portion of your apartment to others, then you are required to be able to deduct all of the necessary and customary expenditures associated with running a rental company out of your flat. If you rent out space for more than 14 days per year, the Internal Revenue Service (IRS) compels you to pay these taxes. It is essential that you maintain detailed records in the event that the IRS asks you to justify your expenditures. To be more specific, you need to provide evidence of the total number of days in a year that the space is rented out since you may only deduct costs associated with those days.

San Francisco Sublet Rules

You are required to collect a 14 percent Transient Occupancy Tax in San Francisco, and you are not allowed to rent out your apartment for more than 90 days a year if you are not there during the rental days (hosted rentals are exempt from this restriction). Hosted rentals are not prohibited. If you make more than $40,000 yearly from subletting, you are required to get a certificate to collect taxes from the Treasurer and Tax Collector. Additionally, you are required to pay your taxes monthly rather than annually. Inquire with the local government about any and all legal requirements that may apply, such as those pertaining to registration, permits, insurance, maximum rent, and informing the apartment’s landlord about your subletting business.

Deducting Subletted Rental Expenses

You would increase your deduction factor by a time factor if, for example, you rented out your extra bedroom for 45 days out of the year. If your deduction factor is 25%, increase that number by 45/365, which is 12.33 percent, to get the total factor, which is 3.08 percent. Your rental deduction is 3.08 percent of the total amount, which in this case would be $1108.80 given that your yearly rent is $36,000. You would use the same overall factor when calculating the cost of shared bills like insurance and utilities. Your rental revenue will be reduced by the total amount of any direct expenditures, such as the cost of providing visitors with meals.