I would like to use the method where I divide up the common space into thirds for calculating expenses since there are three bedrooms. However, this thread with @Carl and @ColeenD3 suggests that common areas should be considered personal use, so now I'm unsure if my method in which I divide the common space into three will work.
For depreciation, mortgage interest and property insurance you use the percentage of square footage that is exclusive to the client. You can not change this in future years. Otherwise, depreciation *will* be wrong.
For all other expenses (like utilities) the IRS says you can use "any reasonable method". There's two basic methods.
Method 1: use the percentage of expenses that equals the percentage of square footage exclusive to the client. So if 15% of your floor space is exclusive to the renter, 15% of your expenses are deductible on SCH E.
Method 2: Use the percentage of people living in the property as a whole. So if you have 5 occupants living in the property and 2 of them are renters, 2/5 (which is 40%) of your expenses would be deductible on SCH E. You *can* change this between method 1 and 2 each year, as an example.
I'm sure there are other methods, as the IRS says any "reasonable" method is acceptable.
-I would be able to just adjust the “percentage of time I used this item for this business” field on the same asset in subsequent years to reflect the amount of time it's been rented, correct?
Don't do that. There's a programming limitation with the TTX program that "WILL" screw things up bad. There's two places where you are asked for "percentage of time". The 2nd place you're asked that is the problem.
As you work through the rental asset in the assets/depreciation section, you are asked for "percentage of time". You were already asked this question before, and answered it. But in the assets/depreciation section, while this is the correct question to ask when the property is 100% rental use, it's the wrong question when renting out a part of your residence. The question should be "percentage of space that is exclusive to the renter". If you answer with percentage of time, the depreciation will be wrong. So answer that 2nd one (in the asset/deprecation section) with your response to "percentage of space". That one must be the same every year. Ohterwise, depreciation gets screwed up.
looks like my expenses + depreciation exceed the rental costs by $423, so it shows up in turbo tax as -$423
It is not common for residential rental real estate to show a profit "on paper" at tax filing time. In fact, it's more common to show a loss with each passing year. Now when renting a part on your residence, it's about 50-50. You may show a slight gain, or a loss. It just depends on the numbers. Either way is fine, and there's nothing to be concerned about, except to make sure you answered "that question" I referenced above, the way I advised you to answer it.
Since I use the rental property as a home, my expenses + depreciation cannot exceed the rental costs. What should I do?
If you do not use that space that is "exclusive to the renter" for any personal use "AFTER" you converted it to a rental, and you are charging FMRV, then what you say does not apply.
Should I just pick a category, say mortgage interest, and decrease it by $423?
Nope. If you don't qualify for carry over losses, then the program will not carry over the loss to next year and you won't be allowed to deduct your losses from other ordinary income. the program (not you) does the math. So leave it alone.
