Tax time is just around the corner. Whether you rent or own, there are home-related deductions you’ll want to make sure to keep track of.
Property owners have substantially more deductions related to their home than renters. But even renters in Massachusetts can deduct some home-related expenses.
Massachusetts rent paid deduction
Massachusetts allows a deduction for rent paid by the taxpayer during the taxable year for a principal residence. The key is principal residence—rent paid on your studio or workspace isn’t deductible on your state return (but may be on your federal). The deduction for each individual is 50% of rent paid, not to exceed a total deduction of $3000. If rent jointly with someone, whether it’s a spouse or a roommate, you’re both entitled to take the deduction, as long as it doesn’t exceed the actual rent paid by each of you.
Only a handful of states provide a rental deduction, and it’s the most common deduction I see missed by tax preparers who are based outside of Massachusetts. If you pay an out of state preparer, make sure to give them your rent paid information.
Renters and homeowners both have the opportunity to deduct costs related to a home office space—but you need to be careful to make sure you qualify. A home office is defined by the IRS as “an office located inside the taxpayer’s home that serves as the taxpayer’s principal place of business.” We tell clients that the space must be used regularly and exclusively for business-related activities. Unfortunately the guest room where you sometimes work or the living room where you work from home during snowstorms doesn’t count.
If you do have a home office, anything expenses related to your home that can’t be separately designated by room are proportionally deductible: rent, mortgage interest, utilities, etc. If you have an expense that’s related only to the office, like a landline phone, that entire amount is deductible. A tax preparer can help you work through the details to make sure you’re claiming expenses properly.
Deductible moving expenses are another area of deductions available to both renters and homeowners. If you have to relocate because of a new job or a transfer with your current employer, your moving, lodging, and transport expenses may be deductible. There is both a distance and a time test that applies to this deduction, so speak to a tax preparer about your situation if you think you might qualify.
Some of the most well known deductions are the ones with the biggest tax impact: interest paid on your mortgage or home equity line, mortgage points, and real estate taxes paid. These three alone can have a huge impact on your return.
If you make energy efficient investments in your home—solar electric, solar water, geothermal heat pump—there is a tax credit (money right back in your pocket) to cover a part of the costs associated with these improvements.
Short-term rental income
If you own rental property that is rented out full time, almost every property-related expense belongs somewhere on your tax return, whether you contract with someone to paint a porch or give your tenants a break on rent because they do the landscaping. Landlords are generally familiar with their extensive recordkeeping and tax requirements.
With the rise of Airbnb, more and more families are generating rental income from their primary residences. Sometimes it is with just a few weekend rentals or perhaps there’s one room that is rented out continuously. Many of my clients who earn income from Airbnb or VRBO don’t think of themselves as “landlords.” They don’t think they would need to change their record-keeping or tax filing—but 99% of the time, they do! They are often mis-filing their taxes or missing out on important deductions.
If you rent out your home, keep records of all your expenses directly related to rental: did you buy new sheets that are just for your Airbnb guests? Also keep track of expenses for the whole house, like what you paid in a year for gas and electricity. See the tips on home office deductions I’ve described above.
The tax code hasn’t quite caught up to the complexity of short term rentals combined with only renting out a part of your home, but that hasn’t stopped the IRS from investigating if you’ve declared even small amounts of rental income correctly. Bottom line: keep good records, and get professional assistance at least for the first tax year you have rental income. It’s worth making sure your T’s are crossed!
Tax law changes
Tax code changes every year. You may need to adjust your record-keeping strategies or want to make property improvement or investment decisions. Be sure to do research or talk with a professional to see how the tax code is different for the upcoming tax year.
Vera Kelsey-Watts is a Certified Financial Planner at Peace of Money. She works with clients to provide objective and personalized financial planning strategies for all stages of life and income levels. Her previous work with nonprofits, social justice, and education informs her practice.