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Depreciation basis for room rental in owner occupied house

We own our own home and have lived in it since 1985. 

this year (2019), we rented out a single bedroom in our house for the entire year, say 20% of total square footage 

what is the basis for depreciation?

is it the price we paid in 1985 + improvements?

is it zero, since we’ve lived in the house for more than 27.5 years?

Or,

is it the fair market value of the house when we converted the room to a “rental unit”?

 

Any insights are appreciated!

 

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Depreciation basis for room rental in owner occupied house

9 Replies

Depreciation basis for room rental in owner occupied house

Depreciation basis for room rental in owner occupied house

Thank you for that

 

clarifying:

 

1985 purchase price is basis (minus land)= 100k

converted 1 bedroom to rental 1/1/2019 20% use ( we still live in the house)

 

so 2019 depreciation will be (100,000 * .20)/27.5=$727 ?

and we won’t have any prior “allowable” depreciation tacked on since it was just converted this year?

 

I am a little worried about how this works with recapture taxes if we ever sell the house later on

 

 

 

Depreciation basis for room rental in owner occupied house

Correct.  Yes, you will recapture the depreciation when you sell the asset. 

Depreciation basis for room rental in owner occupied house

ok, so the depreciation expense only starts counting 27.5 years from when I recategorized the room to a rental, but for the basis it looks all the way back to 1985


and the IRS won’t try to collect “allowable depreciation” for years prior to 2019?

 

 

Depreciation basis for room rental in owner occupied house

Correct. You only recapture what was actually depreciated. 

One question.  I noticed that you did not add any cost of capital improvements to your cost basis.  Such costs should be added to the original basis and depreciation taken on the adjusted basis. 

Depreciation basis for room rental in owner occupied house

thank you for your patience!

 

this article says your pay recapture regardless. 
this is why I’m worried about when it actually starts counting

 

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/yes-you-[product key ...

Depreciation basis for room rental in owner occupied house

That means that even if you chose not to depreciate your asset, the IRS, when you sold or stopped renting, would have you recapture an amount equal to what you could have deprecated during the time you used the property as a rental. 

Hal_Al
Level 15

Depreciation basis for room rental in owner occupied house

 

If this is merely a cost sharing arrangement where the amount paid is below fair market rental, there would be no reportable income to you. If the “rent” amount is fair market value, or more, there is still some question as to whether you even have to report it, as it almost always comes out zero. Most people take the attitude that it is not income; it's just room mates sharing expenses and ignore it. Family, as opposed to unrelated roommates, makes that position stronger.

 

Here’s what you may be required to do:

Report the income (enter at Rents & Royalties/Income & expenses from Rental Properties); and then deduct the expenses on schedule E. If the room mate has full run of the house, and there's just the 2 of you, then half your expenses are deductible (mortgage interest, property taxes, insurance, utilities, repairs, and depreciation [if needed}). Your net income will usually be less than zero.

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.

It is possible for you to gain a positive tax effect from this activity; If enough of your schedule A deductions (mortgage interest &  property tax) are shifted to Schedule E, and your standard deduction becomes bigger than your itemized deductions, you will have effectively saved on taxes.

If you have no mortgage, then there could well be profit involved, which you may have to offset with depreciation that could lead to "recapture" in the future when the property is sold.

https://www.irs.gov/publications/p527/ch04.html#en_US_2014_publink1000219159

TurboTax (TT) does not handle this properly. TT will not limit your deductions to your income. You have to do that manually. TT wants you to enter this as a “not for profit rental”, which does not use Schedule E and puts your expenses on Schedule A (itemized deduction). I'm of the opinion that's not the proper way.

Carl
Level 15

Depreciation basis for room rental in owner occupied house

All of the feedback you've received in this thread *will* confuse you. But it doesn't need to. What you need to do is purchase the CD/Desktop version of TurboTax, physically install it on your computer and then "work it through". Then you will see that a lot of your questions (which you haven't even asked yet because you don't know you have them.) will have obvious answers.

Please don't waste your money with the online version. If you've never dealt with rental property on your taxes before, you will regret it if you use the online version. Purchase the CD version, download it and install it on your computer. Then you can "play and learn" all you like.

https://turbotax.intuit.com/personal-taxes/cd-download/

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