Apparently, there must be some change to the laws on this that I can't find in IRS Publication 527. From what I read (beginning on page 16) while you can use any reasonable method, renting out just two bedrooms in one's house doesn't come anywhere close to 50%.
But the one thing that I do notice is now missing from the 2019 version of the publication, is the "exclusive use of the renter" clause.
Also, there's no mention of splitting costs between SCH E and SCH A by any method other than either;
- Percentage of total square footage (for figuring mortgage interest, insurance and property taxes)
- Percentage of people in the house that are renters.(for splitting utility costs)
On the matter of utilities, it does specifically state that you can't prorate one penny of the telephone bill to the SCH E for the "first" phone line in the house. So if there's only one telephone line to the house, you can't claim a penny of the phone bill as a rental expense.
So if you have a three bedroom house and you're renting out two of them, I don't see how splitting things at 50% would be "reasonable". This seems to be a rather grey area in the publication since "reasonable" is not clearly defined. In fact, it's not even vaguely defined.
The closest thing to clarification is the very first paragraph of that section which states:
"If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property"
I think the key words there are "as though you had two separate pieces of property". That to me seems to be the replacement for "exclusive use of the renter." Now the "Certain Expenses" it defines for the above, are the mortgage interest, property taxes and insurance. On the insurance front it also indirectly insinuates deducting the insurance or portion of insurance that you pay for the "business use" of a part of your home. So this seems to be yet another grey area that leads me to believe you need a separate insurance policy for this.
Now I do know for an absolute fact that the standard homeowner's policy does not cover business use of the property. So if for example there is a fire and it's caused by a paying tenant or occurs in one of the rental bedrooms, that fire occurred at a time it was not being used for it's insured purpose. That's how the insurance company gets out of paying the claim, and they will be successful in doing so.
But if you either got a rider on your existing policy, or a completly separate policy to cover any damages related to the business use of the property, then the cost of that rider or separate policy would be a 100% rental insurance deduction with no prorating required.
