6 Tips for Maximizing ADU or Rental Property Tax Deduction

Find out whether rental property tax deductions are worth your effort.

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.”