How do I accurately calculate percentage of my condo rented out to roommates?

[writermom3]

I own a two bedroom, two bath condo. I live in one bedroom with a roommate; the other bedroom and bathroom are rented out to two roommates. In calculating the percentage of the condo that I rent out, I assume I cannot include rooms such as the living room and dining room since I use them and they are not exclusive to my roommates, yes? Can I use half of the square footage of the bedroom that I share as part of the percentage rented? (I will not include my bathroom but I will include the other bathroom as it is exclusive to the other two roommates.)

[view2 · Accepted solution]

How to divide expenses. If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. You can use any reasonable method for dividing the expense. 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.

Renting Part of Property

http://www.irs.gov/publications/p527/ch04.html#en_US_2015_publink1000219159

[writermom3]

Thanks. Very helpful.

[view2]

Your welcome.

[tututu]

@view2 , if i use number of room method to divide expense, should i use the same percentage when doing depreciation? say, i have total 3 rooms and rent out 1 bedroom, which is 33% rental percentage but maybe only 10% if used square footage method, so when doing depreciation, should i use same 33% or i could only using square footage method, thus 10% of my total house cost for depreciation? thanks. 

[Carl]

I don't see why you want to make your required depreciation as high as you can, when I would expect you would want it to be as low as you can legally get away with.

I can only surmise that most are not aware that depreciation is not a permanent deduction that you can to take and just forget about it. It doesn't work that way.

Depreciation is recaptured and taxed in the tax year you sell the property. Two things to consider when it comes to selling the property and recapturing depreciation.

1) Recaptured depreciation gets added to to your AGI and therefore increases your AGI. That could bump your AGI just enough, so that you don't qualify for certain deductions and tax credits because your AGI is over a given threshold.

2) The increased AGI has the potential to be just enough to bump you into the next higher tax bracket. With current tax law, a jump from the 10% bracket to the 12% bracket may not be much to the tax payer. But that jump from the 12% bracket to the 22% bracket can be a doozy, depending on how much over that bracket threshold one ends up at.

So I do my best to keep my depreciation deduction as low as a legally can. Even then, when I add up the SCH E deductions of mortgage interest, property taxes and property insurance and add that to the depreciation I'm required to take, that total almost always exceeds the total rental income for the year. Add to that the other allowed rental expenses such as repairs and maintenance, and you're practically guaranteed to operate at a loss every single year the rental is in service.

While the losses can and do offset the taxability of recaptured depreciation, I don't think (not sure) those losses lower the AGI realized from that recaptured depreciation.

While the IRS says you can basically use "any method" to determine your rental percentage, the square footage method is probably the easiest to support and prove should you ever have to.

But, even if you do use the SQ FT method to keep your depreciation low, you can still use other methods for claiming utilities. The two common methods are to use the percentage of utilities that matches the percentage of square footage, or the percentage of utilities based on the number of people living in the house.

For example, if you use the SQ FT method and determine that 10% of your floorspace is rental, you only depreciate 10% of the cost basis.

Then for utilities, lets say you have four people living in the house, and two of them are a couple renting one of your two bedrooms. Figuring utilities based on average use per person, that would be 25% for each person renting. In this scenaro, 50% of the utilities would be a deductible rental expense, even though you're only claiming 10% of your floor space as being exclusive to the renter.

Now for utilities, you can change your method each year with no problem. But I don't know if that would get unwanted attention or not. Probably not. But then, I wouldn't want to "experiment" with that either. 🙂

[tututu]

@Carl , thank you for your detail insights! so the tip here is to minimize amount depreciated each year to prevent recapture increased tax due to next bracket and maximize expense used related to rental? then it means we need to use square footage for depreciation and use person divide method (for me is 50% as i live myself and rent for another person only), but will this way IRS well acknowledged using different divide calculation at same time or will something trigger audit and be problematic later? thanks. 

[Carl]

There is no requirement in any IRS pub I can find, that says you are required to use the same method for all splits. For rentals, IRS Pub 527 applies and that pub does cover aspects of renting out a part of your home.

When it comes to depreciation, whatever method you start with, you stay with. You can't change it later.

When it comes to utility deductions, you can actually change methods each year.

One thing that I do need to point out, is concerning a landline telephone. The IRS states that if you only have one telephone line, then you may not allocate any of that costs to the SCH E. It further states that if you have a 2nd phone line and that 2nd phone line is for the exclusive use of the renter, then you can claim 100% of the cost of that 2nd line on the SCH E.

For all other utilities, they must actually be shared with the tenant in order for your to claim a pro-rated amount on SCH E. If it's not shared with the tenant, then you can't claim anything for it on SCH E.