John M. Hoffman & Associates CPAs

Frequently Asked Tax Questions

Rental Property

Three family home – owner lives in one third:

The multi family owner occupied scenario is quite common and is often the entrée into the world of being a landlord for many taxpayers. Think about the property as two separate properties, the portion that the owner lives in and the portion that is rented. 

The cost of the property for purposes of depreciation is allocated between the personal portion and the rental portion. This allocation is most commonly determined on a square footage basis. This allocation % is also used for allocating various expenses. 

Expenses for operating the property fall into three categories:

1. Those that are should be allocated between the rental and the personal portion:

• Mortgage interest and taxes are good examples of this kind of expense.

• Roof repair is another typical example of an expense that is allocable based on the rental / personal allocation formula.

2. Those that are 100% allocable to the rental portion.

• Having a plumber come and repair a broken toilet in the tenants unit is an example of this.  

3. Those that are 100% personal.

• For example, an electric bill for your personal unit of the home is not deductible and not relevant to your taxes as it relates to the rental property.

• If you renovated a kitchen in your residence share of the property, while this is not currently deductible, you would want to keep track of this for purposes of knowing your basis in the property.

Knowing your basis is important for purposes of determining any gain on the sale of the property or as a starting basis point should you convert that portion to rental.

Expenses for a less than 100% rental property are assumed to be "category 1" above, unless otherwise specified - accordingly if something is 100% allocable to the rental portion - please specifically designate as such.