Home mortgage as rent

[stech]

I live with my brother and owned that house until Sept 2020 we refinance and I no longer owner of the house (including deed/mortgage). I did pay 1/2 of mortgages for full year 2020. I have a 1099-MISC job, which is 100% work from home. Can I deduct 3 months as rent expense? or should I use home office deduction.  From what I see, home office deduction (250 sq. ft) is small and its only for home office. Since I work and live in the house & pay rent, which would be higher. Can I deduct rent/insurance/water bill

[DMarkM1]

It's a home office deduction either way based on the square footage used as the home office.  Your rent payment is allocated based on the business use.  All of those items: utilities, etc are entered as indirect costs for the home office and prorated based on business portion of the property. 

You would need to decide which is best for you; the simplified calculation on entering direct/indirect expenses.

[stech]

If I use the Simplied Method, it would be $1,250 ($250 sq ft x $5 per sq ft).  I paid $1200 mortgage/rent. Full house is 6,000 sq ft.  That's 4% (250/6000). Does this mean, I would deduct $48 per month (4% x $1200).

Can I say, I paid $600 per month for rent regardless of size of office. I am thinking, when firms actually rent offices, they pay monthly $1000+ & expense that too. They don't actually count each sq ft to see how much is business only. I feel like, I paid for the basement rent while my brother paid for upper portion. What I do in the basement isn't necessary. I can sleep & have personal activity, as long as all is business property. 

I have seen ppl take direct expense of 10K for rent, without consideration of actual sq ft.  

If I choose to expense $5K as rent expense, does my brother need to report this as rent income for Sch E or C?

[gloriah5200]

There are set rules and guidelines as to how you calculate your home office deduction. 

You cannot just decide how much rent you want to consider paid.  You must use actual guidelines set up by IRS for making that determination and as always,  you must keep records in case yuo get audited.

You would use Form 8829 in the return to make the calculations with IRS Pub 587 providing guidelines and the line-by-line instructions for the 8829 also providing guidance.

IRS Instructions for Form 8829

IRS Form 8829 for reference

One of the rules is that the space must be used:

• Exclusively and regularly as your principal place of business

To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business.

The area used for business can be a room or other separately identifiable space.

The space does not need to be marked off by a permanent partition.

You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.

During the ownership period, unless you use the simplified method for the year, you will have to calculate depreciation, too, but not for the rental period.

So, the space must be exclusive use for your home office...You cannot use it as both an office and a spare bedroom or an office and a tv room, etc.

There are only 2 exceptions:

• If you operate a day care business or 
• If you only use the space to store inventory or supplies

As a self-employed person, you would use Form 8829 to calculate your actual expenses unless you decide to use the simplified method.

You can claim a % of actual expenses, whether that is mtg interest, real estate taxes, electricity, etc. or rent.  So if you had a space that was exclusive use for the whole year, you should be able to deduct the mtg interest, etc., while you shared ownership for # months and then the other months, claim the % of rent paid.  You will have to do the math to only include the correct amounts since you are switching during the year and use the column for exact amount, not use the % in the form/software.

IRS publication 587 contains additional details on the Home Office Deduction:

IRS Publication 587 Office In Home