When can I Take a Rent Deduction?

Jodee Redmond

In the United States and Canada, a rent deduction can be used by a taxpayer who is operating a business. He or she can deduct the cost of space used for business purposes from his or her annual income. When the business is being operated from a rented home, the amount that can be deducted for this purpose is a percentage of the full amount paid for housing throughout the year.

Man with hands on his hips
Man with hands on his hips

If a person is running a company for the purpose of generating a profit, he or she can deduct certain expenses from the income it generates for tax purposes. Personal expenses cannot be deducted from income for tax purposes. To qualify as a business expense, the owner must be able to demonstrate that the expense was incurred for business purposes. A rent deduction is only one example of this type of expense.

A person operating a store or renting a building that is being used entirely for business purposes will be able, for tax purposes, to deduct this cost from the income the business generates. As long as the premises are being used solely for business purposes, the full amount of the rent paid for the space is tax deductible. Any personal use means that the amount of the rent deduction must be reduced to reflect this fact.

If the space being rented is used for business purposes only part of the time, then the rules are slightly different about being able to take a rent deduction. In that case, the rent can be deducted only for the time the premises are being used for business purposes. In a case where part of a building or rented home is used to operate a business, the square footage that is devoted to business purposes can be used to calculate the amount of rent that is tax deductible.

As an example, if a business owner is paying rent on a 2,000 square foot (609.6 square meters) home and 500 square feet (152.4 square meters) are being used exclusively for business purposes, then a quarter of the rental payments are tax deductible. A person who wants to be sure that he or she is in compliance with the applicable income tax laws should consult with a tax professional about the amount of rental deduction that will be allowed, if any. Part of keeping appropriate records for income tax purposes includes keeping receipts for all business-related expenses. To claim a rent deduction, the business owner must be able to clearly show the amount of payments made for this purpose and to whom they were made.

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