One common tax myth is the belief that you can write off your entire rent or mortgage payment. This misconception can lead to incorrect deductions and potential issues with the IRS. Here's what you need to know to stay compliant and avoid these pitfalls.

Origin of the Myth

• Expense Confusion: Many people assume that significant expenses like rent or mortgage payments should offer tax relief.

• Lack of Awareness: There is often confusion about what portions of housing expenses are deductible.

Reality of Deducting Rent or Mortgage Payments

• Mortgage Interest Deduction:

• Qualified Homes: Only the interest paid on mortgages for your primary or secondary home is deductible. This does not include the principal repayment.

• Form 1098: Mortgage lenders issue Form 1098, which details the amount of mortgage interest paid.

• Rent Payments: Generally, rent payments are not deductible on federal tax returns for personal residences.

• Home Office Deduction:

• Exclusive Use: If part of your home is used exclusively and regularly for business, you may qualify for a home office deduction.

• Direct and Indirect Expenses: You can deduct a portion of your rent or mortgage interest, along with other expenses like utilities, based on the percentage of your home used for business.

• Form 8829: Use Form 8829 to calculate and claim the home office deduction.

IRS Guidelines on Housing Expense Deductions

• Mortgage Interest: Deductible for primary and secondary homes, subject to certain limits.

• Limits: Interest on mortgages up to $750,000 ($375,000 if married filing separately) for loans taken after December 15, 2017. For loans taken before this date, the limit is $1 million ($500,000 if married filing separately).

• Home Office Deduction:

• Requirements: The space must be used exclusively and regularly for business purposes.

• Simplified Option: There is also a simplified option for calculating the home office deduction, allowing $5 per square foot of home used for business, up to 300 square feet.

Why the Myth Persists

• General Misconceptions: Many taxpayers believe that all large housing expenses should be deductible.

• Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.

Avoiding the Pitfall

• Understand the Rules: Clearly understand the IRS rules for deducting mortgage interest and rent payments.

• Mortgage Interest: Deductible with limits on the loan amount.

• Rent Payments: Generally non-deductible unless part of a home office deduction.

What You Need to Do

• Accurate Reporting: Ensure that you only deduct allowable expenses, such as mortgage interest or eligible home office expenses.

• Keep Detailed Records: Maintain accurate records of mortgage interest payments, rent payments, and any home office expenses.

Consulting a Tax Professional

• Seek Professional Advice: Consulting a tax professional can ensure you correctly identify and claim eligible deductions for housing expenses.

• Accurate Records: A professional can help you maintain proper documentation and navigate the complexities of deducting housing-related expenses.