urban-hipo
Returning Member

Renting out part of home, depreciation and sqft vs room method

I purchased a house in June of 2021. In the first two months I rented it back to the previous sellers (part of the sale contract). As soon as I moved in I rented out one room to a roommate. The apartment is a 2bed with 1 living room. I have read many articles online and threads in these forums and still cannot understand what portion of the apartment I can define as "rental" (for the roommate, I think the first two months are 100%.) I chose a multi-family (unit in multiunit) and wrote in ~180 days, starting basically from when I purchased the apartment.

 

The room is about 200sqft out of a total of 950 sqft, that would be 21%. If it's rooms out of total rooms, that would be 1/3, so 33%. If it's out of bedrooms, or % of people, it's 50%. Here's what the help page on the relevant page says:

"You can use any reasonable method to determine the percent of your home being rented. Most commonly, you can base it on the number of rooms rented to total rooms, or based on the square footage of the rental space compared with total square footage. You could also base it on the number of people in the rented portion compared to the non-rented portion."

 

The IRS publication 527 states:

"It may be reasonable to divide the cost of some items (for example, water) based on the number of people
using them. The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home."

However, in various posts experts and champs have said that the only reasonable way is sqft. For example:

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/if-i-am-renting-one-r...

 

I am not sure I understand why though -- my roommate often brings friends, and uses the living room such that I can't use it. For example, we divide weekends for hosting in the living room. Etc. I am maintaining and furnishing all these spaces for his use as well. Trash removal, elevator maintenance, building common spaces maintenance, which are paid through HOA fees would reasonably be %50 for him, since he uses all these services on an equal basis to me. (So I think  are similar to the water example given in the IRS publication 527, page 16.)

 

So I guess my first question is why is it unreasonable to deduct 50% since I we essentially co-live in all the same places, and my room is equal in size to his? Or 33% based on the room method? (which is explicitly mentioned in the IRS publication...)

 

My second question relates to the depreciation part.  This is a condo with no land rights, and the city calculates its land value as 0. So I put in the full cost basis: $780,000. TurboTax calculates this years depreciation at about 15,000 (both rounded for anonymity), or about 1.8% of the cost basis. I think that's the correct depreciation since I only had it for six months.

What I don't understand is this: when I check the actual SCH-E TurboTax prepares it divides my HOA, repairs, etc according to % I entered as being rented out. Except for the depreciation. It includes the full value of the depreciation: -15,000. I therefore show a significant loss that seems excessive, and meaningfully reduces my taxes and even my gross income.

I tried following this:

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/if-i-am-renting-one-r...
But TurboTax never asks me "I purchased this asset new" - it asks if I purchased the asset, and the other option is "No, I acquired it in a different way" - which is clearly false, since I certainly purchased it. If I do click "No", it offers a number of other "ways", such as inheritance. 


Third, does anyone know how I account for the period in which I rented to the sellers (arrangement was called "use and occupancy" and was part of the sale contract)

 

Finally, if anyone knows what are the implications of these depreciation deductions for capital gains taxes and the homeowner capital gains exemption and could provide any clarity, that would be super appreciated. (@Carl would highly appreciate your input!)


Thanks!!