My question is regarding Form 4562 and Schedule E and how to properly enter a depreciation deduction.
If the property in question is a mixed use rental of a room in an owner occupied residence with both rental days and personal days, placed in service during a given year, rental expenses including depreciation, as I understand, must be divided between personal use days and rental days.... So in Part III Line 19h on Form 4562, you enter the date placed in service, the cost basis, and then you use the MACRS tables to find out the appropriate percentage for calculating the depreciation deduction... However, for mixed use (personal days and rental days), you'd have to divide the depreciation expense between the personal and rental days and then enter only the rental use percentage on Schedule E.
So my question is: Do you enter the lower (rental portion only) expense in both line 18 of Schedule E as well as lines 19h and 22 of Form 4562, or do you enter the higher (not yet divided up) deduction on Form 4562, and then only put the lower divided up expense on Schedule E?
Should the numbers on these two forms be different or the same in the mixed use circumstance?
I see this all the time. The program lacks the clarity you need for "YOUR" specific situation.
When renting out a part of your primary residence, the percentage of the floorspace that you are renting out is ONE HUNDRED PERCENT business use and ZERO personal use days.
Days rented count starts on the first day a renter "could" have moved in, and your personal use days will be ZERO *FOR* *THAT* *PERCENTAGE* *OF* *FLOOR* *SPACE* that is exclusive to the renter.
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.
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. If you do need to enter depreciation, you have to manually enter the depreciable amount.
Thanks to both of the repliers for the information, however my original question isn't yet answered.
My understanding is that even if the renter has the full run of the house, I'm only able to deduct expenses for the exclusive use portion - i.e., the shared space portion cannot be deducted at all since I have access to and use it, and I can't deduct for personal use days if the renter moves out and I'm using the room at all myself while looking for a new renter.
I am not using a tax program to enter information - I'm simply filling out the required form myself and need to know whether line 19h of Form 4562 and Line 18 of Schedule E should be the same or different if there are personal use days during the year. So for example: If in the first year, the room is placed in service such that there are 200 days when the room is advertised or rented out, the room is rented at a fair market price for 120 days, and the room is used for personal purposes for 40 of the unrented but advertised days, and vacant and ready to be rented for 40 of the unrented but advertised days, then I should be taking depreciation for the 160 days when either rented, or available for rent and not in personal use. So if my depreciation for all 200 days would have been 100 dollars, I can only claim 160/200 of that, or 80 dollars.
So should it be entered as 100 on form 4562 line 19h since that is what the service date, cost basis, and MACRS table calculates as the total depreciation, and then entered as 80 on line 18 of Schedule E, since that is the depreciation proportionally divided between available for rent or rented and personal use days, or should the 80 be entered in both 4562 lines 19h/22 and Sch. E line 18 since that is the deduction being claimed?