1) I purchased house/land in 2007 that my family has resided in continuously as our primary residence. I began renting a bedroom in 2021 for income purposes. How do you value the asset?
You select the option for "I rent out a part of my house" along with whatever else applies on that screen.
The bedroom is 17% of the total house square footage so I apply that to house utility expenses, etc. But is the value of the room that I put into service for rental purposes in 2021 based on the fair market value then or what it was in 2007?
The program will ask you what percentage is rented out. You'll enter the percentage that is "exclusive to the renter". For example, the bedroom is exclusive to the renter. If you have a 2-bath house and one of the baths can only be access from the rented bedroom, then you can include the square footage of that bath, as it would also be exclusive to the renter. If the total percentage of floorspace that is exclusive to the renter is 17%, then that's what you enter.
2) Regarding depreciation on rental improvements like carpeting and appliances, is there a recapture tax in the future?
Yes.
3) Regarding depreciation on the rental itself, can you confirm that even if you don't deduct it, there is still a recapture tax owed to IRS?
Yes. Even if you don't take the depreciation, you are still required to recapture and pay taxes on the depreciation you "should" have taken, in the tax year you sell the property.
4) Can you confirm that you can still take the $500,000 capital gains reduction (for joint filers) when you sell the home of which you rented out a room for a number of years.
That can get tricky. Every word of the following statement matters. Every. Word.
If the part you are renting out was not rented out and therefore included as "a part of" your primary residence for at least two years (730 days) of the last five years (1826 days) you owned it, counting back from the closing date of the sale, then you would qualify for the entire exclusion amount, provided the last occupant to vacate that rented area prior to the sale was a paying tenant.
5) Are there any issues here affected by CA tax rules since I reside in CA.
I can't provide any response to this one, as I reside in FL and have never dealt with state taxes. FL does not tax personal income.
Also, percentage of floor space that is exclusive to the renter, matters for depreciation, insurance and property taxes. For utilities, you have two choices.
Choice 1.) You can use the same percentage method as you did for depreciation. But understand that in order to claim that percentage of a utility cost as a SCH E expense, the tenant must have access to it. For example, if you have cable TV and there is a cable drop in the tenant's room, then you can claim that portion of it for the renter, weather they actually use it or not. (They have access to it for their own TV. If they don't have their own TV, that's not your problem.) Otherwise, if there's no cable drop for the tenant's exclusive use, then you can't claim any part of the expense.
Choice 2) You have the option to clam that percentage of utilities based on the number of occupants. For example, if you, your wife and your child live in the property as your primary residence and you rent a room to a couple, that's a total of 5 people living in the house. You allocate 20% of your utility cost to each person. Since 2 of them are renters you can use this method to claim 40% of your utility expenses as a SCH E expense.
One special thing to note regardless of what method you use, if your home has one single land line telephone, you can't claim any of that cost on SCH E. Not a penny. Says so in IRS Publication 527 at https://www.irs.gov/pub/irs-pdf/p527.pdf on page 16 at the top of the 2nd column.
