Tax Deductions for Owner-Occupied Multifamily Properties

If you live in one unit of a duplex, triplex, or other small multi-family building and rent out the rest, you get access to two sets of write-offs at once. Tax deductions for owner-occupied multi-family properties work by splitting every shared cost between personal use and rental use: the rental share (plus anything that belongs only to the rental units) is deducted on Schedule E against your rental income, and the personal share of mortgage interest and property taxes can still be itemized on Schedule A. Getting the split right is the foundation for everything else, from depreciation to the qualified business income deduction to the passive loss allowance.

Setting Your Rental-Use Percentage

The IRS accepts any reasonable method for allocating shared costs. Two are standard.

The square footage method divides the total square footage of the rental units by the total square footage of the building. A 1,200-square-foot rental in a 3,000-square-foot building gives you a 40% rental allocation.¹

The rooms method works when rooms are roughly equal in size. Two rented rooms out of six total is about 33%.¹

Pick a method and use it consistently from year to year. Keep receipts, invoices, and logs that support the allocation. Records tied to the property should be kept until at least three years after you file the return for the year you sell.²

One point worth clearing up: a rental unit sitting empty between tenants still generates deductions. As long as you’re actively trying to rent it, operating expenses, maintenance, and depreciation continue. You just can’t deduct the lost rent itself.³

Operating Expenses You Can Deduct

Apply your rental percentage to every shared cost that keeps the property running. Costs that belong only to a rental unit are 100% deductible; costs that belong only to your personal unit are not deductible on Schedule E at all.³

Mortgage Interest and Property Taxes

Mortgage interest is usually the largest shared cost. The rental portion goes on Schedule E as a business deduction. The personal portion moves to Schedule A if you itemize.⁴ Property taxes split the same way.

Insurance, Utilities, and Maintenance

Homeowner’s insurance premiums split by the rental percentage. If the building runs on one meter, split the utility bill the same way.³ Routine upkeep of shared spaces (hallways, yards, driveways) follows the split. Paint or repair work done only inside a rental unit is fully deductible with no allocation.

Travel and Mileage

Trips to the hardware store for rental repairs, drives to meet contractors, and visits to your property manager count as deductible travel. For 2026, the standard mileage rate is 72.5 cents per mile, or you can track actual vehicle expenses instead.⁵ Keep a log recording date, destination, and purpose.

Professional Fees and 1099s for Contractors

Legal fees, accounting costs, and property management fees tied to the rental are deductible. If a professional serves the whole property, apply the rental percentage; if the service was only for the rental side, deduct it in full.

Pay attention to the 1099 threshold. If you pay any individual contractor $2,000 or more in a calendar year for rental-related work, you must file Form 1099-NEC. That threshold rose from $600 for returns filed for tax years beginning after 2025.⁶ Collect a W-9 before you pay anyone.

Repairs Versus Capital Improvements

This is the classification that trips up the most landlords, because it controls when you actually get the deduction. A $10,000 repair produces a $10,000 deduction this year. A $10,000 improvement gets spread over 27.5 years of depreciation, roughly $364 per year. The incentive to call everything a repair is obvious, and the IRS knows it.

A repair keeps the property in normal working condition: patching a roof leak, fixing a broken window, repainting a room. A capital improvement adds value, meaningfully extends the building’s life, or adapts it to a different use: a full roof replacement, a new HVAC system, converting a garage into a rental unit. Improvements must be depreciated.³

For borderline cases, the IRS uses a three-part test. An expenditure must be capitalized if it is a betterment (fixes a pre-existing defect, adds something new, or materially increases capacity), a restoration (replaces a major component or returns the building to like-new condition after damage), or an adaptation (converts the property to a substantially different use). If none of those fit, it’s a currently deductible repair.

Two Safe Harbors That Save the Paperwork

The de minimis safe harbor lets you deduct any individual item costing $2,500 or less in the year you pay for it, so long as you make the election on your return. It works well for a replacement appliance or water heater.⁷

The safe harbor for small taxpayers goes further. If your building has an unadjusted basis of $1 million or less, and total spending on repairs, maintenance, and improvements for the year doesn’t exceed the lesser of $10,000 or 2% of the building’s unadjusted basis, you can deduct all of it currently.⁸ For many small multi-family owners, this covers a typical year’s work.

Depreciation on the Rental Portion

Depreciation is usually the single largest deduction available, and it costs nothing out of pocket in the current year. It represents wear and tear on the building, spread over an IRS-mandated recovery period.

Land can’t be depreciated, so first separate the land value from the building value. Many owners rely on the ratio shown on their local property tax assessment. If you paid $500,000 and the assessor pegged the land at 20% and the building at 80%, the building starts at $400,000.⁹ Multiply the building value by your rental percentage to get the depreciable basis for the rental portion. At a 40% allocation, that’s $160,000.

Residential rental property depreciates straight-line over 27.5 years, so a $160,000 basis produces about $5,818 per full year.³ Your first and last years are prorated under the mid-month convention, which treats the property as placed in service at the midpoint of the month you began renting. Depreciation starts when the unit is ready and available for tenants; you don’t need to have signed a lease yet.

Personal-Side Deductions on Schedule A

The personal share of your mortgage interest and property taxes still counts, if you itemize.

Mortgage interest is deductible subject to the acquisition debt cap. Mortgages taken out after December 15, 2017 are limited to $750,000 of debt ($375,000 if married filing separately); older mortgages may qualify under the previous $1 million limit.¹⁰ The cap applies to your total acquisition debt across all properties, not just the personal share of this one building.

Property taxes on the personal side count toward the state and local tax (SALT) deduction cap. Under the One Big Beautiful Bill Act, the SALT cap for 2026 is $40,400 ($20,200 for married filing separately), covering state income tax and property tax combined. The rental share of property taxes on Schedule E is not affected by the SALT cap.

The Qualified Business Income Deduction

The Section 199A qualified business income deduction lets eligible rental owners deduct up to 20% of net rental income. The deduction was made permanent under the One Big Beautiful Bill Act, and for 2026 the income phase-in range for limitations is $75,000 for single filers and $150,000 for joint filers.

To qualify, your rental activity generally needs to rise to the level of a trade or business. One established path is the safe harbor under Revenue Procedure 2019-38, which requires at least 250 hours of rental services per year, covering tasks like advertising, screening tenants, collecting rent, and coordinating maintenance. Property used as a personal residence is excluded from the safe harbor, so only the rental portion of your building counts. You also need to attach a statement to your return each year declaring your reliance on the safe harbor and describing the rental property. Even without the safe harbor, your activity may qualify under general trade-or-business principles.

Passive Loss Rules and the $25,000 Allowance

Rental real estate is passive by default, meaning losses can’t offset your salary or other non-passive income. Unused losses carry forward until you have passive income to absorb them or you sell the property.¹¹

There’s a meaningful exception for hands-on landlords. If you actively participate in the rental (approving tenants and repairs, setting rent), you can deduct up to $25,000 in rental losses against other income each year.¹² Owner-occupants of small multi-family properties almost always clear this bar.

The $25,000 allowance phases out as modified adjusted gross income rises above $100,000, at a rate of 50 cents per dollar, and disappears entirely at $150,000. These thresholds are set by statute and don’t adjust for inflation.¹³ Losses you can’t currently use aren’t lost; they accumulate. When you sell the property in a fully taxable sale, suspended passive losses from that property become deductible at once.

Where It All Goes on the Return

Rental income and deductible expenses flow through Schedule E (Form 1040), Part I. Enter gross rental income first, then each allocated expense category: advertising, insurance, interest, repairs, taxes, utilities, and depreciation.¹⁴

Depreciation requires Form 4562 any year you first place property in service or claim a new improvement; the figure calculated there goes to Schedule E, line 18.⁴ If you’re claiming a loss and need to apply the $25,000 allowance or carry forward suspended losses, use Form 8582 for the passive activity math.¹¹

What Happens When You Sell

Selling an owner-occupied multi-family property triggers two different regimes because the IRS still treats your personal unit and the rental units as separate activities.

The gain from the personal-use portion qualifies for the Section 121 home sale exclusion: up to $250,000 of gain excluded if single, $500,000 if married filing jointly, provided you owned the property and used the personal portion as your main home for at least two of the five years before the sale.¹⁵ Allocate total gain between personal and rental using the same percentage you’ve used for expenses all along.

The gain on the rental portion doesn’t get the Section 121 exclusion. On top of that, every dollar of depreciation you claimed (or should have claimed) on the rental units gets recaptured at a maximum federal rate of 25%, known as unrecaptured Section 1250 gain. If you depreciated $100,000 over the years, up to $25,000 could go to federal recapture tax before regular capital gains apply to any remaining rental-side profit. Sellers who forget about recapture are often the ones surprised at closing.

1
Internal Revenue Service. Publication 587 (2025), Business Use of Your Home
2
Internal Revenue Service. How Long Should I Keep Records?
3
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
4
Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
5
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents
6
Internal Revenue Service. Publication 1099 General Instructions for Certain Information Returns (For Use in Preparing 2026 Returns)
7
Internal Revenue Service. Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement
8
Internal Revenue Service. Tangible Property Final Regulations
9
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
10
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
11
Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits
12
Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
13
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
14
Internal Revenue Service. Tips on Rental Real Estate Income, Deductions and Recordkeeping
15
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence