Renting Your Home to Your Business and Other Tax Breaks

Tax burdens for businesses add up quickly. And these can become complex if you’re running your own medical practice or small company. There are several deductions to be aware of if you own a home that can help save you a lot of money come tax time. 

Here’s what you need to know about renting your home to your business, as well as additional ways homeowners can keep more of their income: 

What are qualified homes?

First, determine whether or not your residence is considered a “qualified home.” It must be:

• Your main home or second home
• If your second home is rented, you must use it more than 14 days out of the year, or more than 10% of the number of days it’s rented out
• Qualified homes can include houses, condos, cooperatives, mobile homes, house trailers, boats, or a similar residence that has sleeping, cooking, and toilet facilities
• You are limited to only one second home at a time

Income tax deductions for your primary home

Now let’s look at income tax deductions for your primary residence:

1. Mortgage interest

You may be able to deduct mortgage interest on your primary home. Here are the limitations to be aware of for these deductions:

• A limit of $1 million (or $500,000 for married, filing separately) for debt incurred on or before December 15, 2017
• A limit of $750,000 (or $375,000 for married, filing separately) for debt incurred after December 15, 2017
• Home equity for debt incurred after October 13, 1987. Interest is deductible only if gains are used to buy, build, or substantially improve the home
• Points may be deductible if paid for in cash at closing. If you roll your points into your refinanced loan, you can only deduct points over the life of the loan

Other forms of deductible interest include interest paid at closing, late payment charges, and any mortgage prepayment penalty.

Examples of non-deductible mortgage interest include interest on a loan that was not put back into the home, debt not secured by a mortgage on a home, prepaid interest, rent, amounts charged for services, and points that were paid by the seller when you bought the house.

2. Mortgage insurance

Mortgage insurance is deductible if the mortgage was issued after December 31, 2006.

3. Real estate taxes

The real estate tax deduction is limited to $10,000, or $5,000 if married and filing separately, and this includes any other state and local, property, and income taxes. 

You won’t be able to deduct:

• Delinquent taxes imposed on the seller that are paid by the buyer
• Escrow payments
• Charges for services
• Assessments for local benefits
• Transfer or stamp taxes when you buy property
• HOA assessments

4. Residential income tax credits

Keep in mind that there are home tax credits related to energy usage. The residential energy credit is for solar equipment, wind turbines, and fuel cell equipment, and it’s:

• 30% for property placed in service between January 1, 2017, and December 31, 2020
• 26% between January 1, 2020, and December 31, 2020 
• 22% between January 1, 2021, and December 31, 2021

Another credit is the energy-efficient home credit of up to $2,000, which is available to homebuilders and developers.

Additionally, there are two potential credits related to your home office. The first is the rehabilitation tax credit, which is 20% of qualified rehab expenditures, up to $5,000 (but subject to a phase-out if your income is high, above $200,000 AGI). The other one is the disabled access tax credit, which is 50% of the cost of Americans with Disabilities Act (ADA)-eligible expenses up to $5,000.

5. Gain exclusion on the sale of your home

The gain exclusion provides the ability to exclude all or part of the gain from taxes when you sell your home—a benefit equal to $250,000 if filing single and $500,000 if married. But there are a few things to note:

• You must have used the home as your primary residence for at least two out of the last five years before the sale
• You can use the exclusion once every two years
• If gains exceed the exclusion amount, then Section 1031 “like-kind exchange” rules may apply to the remaining gain

Renting your home for your business and other tax-break opportunities

Certain deductions can apply if you have a business or any form of passive income, or if you’re a W-2 employee and your employer provides these to you as a fringe benefit.

Renting your home

You can rent your home for up to 14 days each year without having to report that money as income. Make sure that the rental amount is reasonable based on comparable accommodations (look to Airbnb, Zillow, or hotels to gauge rental value). 

Ensure that you document the purpose of the rental, who was there, how it relates to your business, what the business relationship is, and what kind of discussions were held. These records will be necessary in the event of an audit.

Deducting home expenses

You can deduct expenses associated with your home if it is your principal place of business, you use it to meet clients, patients, or prospects in the ordinary course of business, or it is a separate structure not attached to your dwelling unit.

To calculate your home office expenses:

• Determine the business-use percentage (BUP) (using the net square footage calculation)
• Deduct the BUP from the sum of your rent, mortgage interest, real estate taxes, utilities, insurance, garbage pickup, and security costs
• Add in the cost of all furniture, fixtures, equipment (which is also eligible for depreciation) located in your home office

Maximizing COVID-19 deductions

Because we’re living in a pandemic, there are certain payments from employers that are currently tax-exempt. Included expenses are as follows:

• Payments received for necessary personal, family, living, or funeral expenses incurred as a result of COVID-19
• Payments received for reasonable and necessary expenses incurred for repair or rehab of a personal residence or its contents if attributable to COVID-19

Also, qualified COVID-19 disaster relief payments are free of income tax, payroll taxes, and self-employment tax, and are deductible by the business.

If you have further questions about renting your home to your business and other home-related business deductions, Physicians Tax Solutions  is here to help. We’re committed to assisting clients with tax-saving strategies. 

Physician Tax Solutions supports busy medical practitioners with proactive strategies and full-service tax preparation services that dramatically reduce tax bills. Contact us online or by calling 1-855-693-7829 to start saving today.

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. Physiciantaxsolutions assumes no responsibility for actions taken based on the information provided in this post.