Tax Deductions When Renting a Primary Residence
Unlike homeowners, who receive significant tax breaks each year that help alleviate the burden of mortgage payments and other costs of home ownership, renters receive few or no similar deductions. While the purpose of the home mortgage deduction was to encourage and help subsidize home ownership, this rationale may be of little consolation to renters, who can sometimes find themselves with greater tax burdens than similarly situated homeowners.
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Tax Consequences of Owning vs. Renting
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When a homeowner makes a mortgage payment and itemizes her deductions, she can deduct the interest portion of that payment from her income taxes. This presents a huge benefit to homeowners, as such deductions can reduce total mortgage costs by 30 percent or more. Additionally, homeowners can deduct property taxes, mortgage closing costs and some other related expenses.
While renters may be entitled to some state deductions and, in rare cases, property tax deductions, they cannot generally avail themselves of the tax breaks that homeowners receive.
Renter's Deduction in Some States
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In a few states, such as Indiana and California, renters can receive a limited tax deduction that helps to mitigate some of the disparities between the tax burdens of homeowners and those of renters. However, in addition to being subject to total caps or income-based limitations, renter's deductions are also limited to state income tax filings. Thus renters still receive no relief for their more significant federal tax burdens.
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Home Office Deduction
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While renters cannot deduct rent in the same manner that homeowners deduct mortgage interest, they are still entitled to take advantage of at least one significant tax advantage traditionally afforded to homeowners. Renters who run businesses from their homes are able to deduct a percentage of their rent with respect to their home offices, following generally the same rules that homeowners use for their own home office deductions. Home office deductions for both renters and homeowners are subject to a number of limitations and qualifications.
Renting May Still be Preferable
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Renters disappointed about the lack of a federal renter's deduction should remember that the total cost of renting vs. buying is the most important metric. Landlords can deduct mortgage and other costs from their rental income, and some of these tax savings may be passed along to renters. Additionally, many of a homeowner's costs, such as maintenance and repair, are avoided by renters, who can simply call the landlord or maintenance company to have a problem fixed. Finally, when the housing market fluctuates, renters in some locations may realize that renting is sometimes more cost-effective than buying, even after the mortgage deduction has been taken into account.
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References
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