Owner Occ Duplex

I was talking to my realtor about buying a duplex, living in one side and renting the other. She is worried that we are going to get into tax trouble by doing this because we won’t be able to deduct the full interest. Can anyone comment on this?

One half of the price is your basis in the rental portion. The income from the rent is what is reported on schedule E along with half the expenses.

You neither claim income nor expenses for your side.

When my daughter was in college we bought a 4Plex. She occupied one of eight bedrooms. The other 7/8 were income property.

Most any tax preparer will not have a problem with how to report it.

Your real estate agent may have more information about your personal finances than you are sharing with us.

For a duplex, all of the mortgage interest is a potential deduction. The portion of the mortgage interest allocated to the rental unit is expensed on Schedule E (1040). The portion of the mortgage interest allocated to the residence unit is deducted on Schedule A.

Of course, you have to itemize deductions to take advantage of the home mortgage interest deduction on Schedule A. If your itemized deductions will be less than the standard deduction, then you won’t want to use Schedule A and you will not be able to deduct the home mortgage interest on your residence unit.

All that said, your primary concern shouldn’t be about the tax deduction. Instead, look at the cash flow. If you buy the duplex, will the rental unit cover most (if not all) of your mortgage payment anyway? If so, then aren’t you essentially living in your residence unit, rent free? How much more disposable income will you have if you purchase the duplex versus spending the same amount of money on a SFR?