My niece rents a room in my home, It is 13% of my square footage, therefore can I claim only 13% of expenses on Schedule E?

[Hal_Al]

If this is merely a cost sharing arrangement where the amount paid is below fair market rental, there would be no reportable income to you. If the “rent” amount is fair market value, or more, there is still some question as to whether you even have to report it, as it almost always comes out zero. Most people take the attitude that it is not income; it's just room mates sharing expenses and ignore it. Family, as opposed to unrelated roommates, makes that position stronger.

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.

If your niece has full run of the house,  then you deductions are not limited to her 13%. For example, if the house has 3 occupants, her use is one third (33%) and you my deduct 33% of the expenses, up to the amount of the rent.

[marcjy1]

Thank you very much, please let me expand.

My niece receives SSI. So she is on their books as a renter under a rental agreement with me as landlord.

So, when I do my 2019 taxes, I would include her as disabled because I am trying to claim her as a dependent even though she is a renter.

Only the two of us live in my home, but she does in fact have full run of the house except for my bedroom.

But, I always thought I could claim expenses on schedule E only for her portion of the house which is 13% of total square footage of the house.  

[Carl]

I always thought I could claim expenses on schedule E only for her portion of the house which is 13% of total square footage of the house.

That would be true for a non-related renter. But this is family. Generally for a non-related renter your deductions would be limited to that percentage that is "exclusive to the renter". But that's not so for family. If this rental contract is something that impacts her SSI or other disability pay, then you need to claim it on SCH E as rental income. Shouldn't be an issue since your losses are limited to the rental income which will do two things.

1) Net result will be zero taxable rental income for you.

2) Your "renter" meets the legal requirements (if any) of whatever SSI or disability pay she receives not only by showing that she pays rent, but also by you showing on your tax return that you are "in fact" claiming that rent as income.

Since there's only two of you in the house, if the rent being paid is significantly less than 50% of the FMRV of the property as a whole, then when asked you'll indicate that you "do" charge rent at below FMRV.

[Hal_Al]

Be advised that TurboTax does not handle this situation well. It will not  disallow your loss on Schedule E.  You should not enter more expenses than the rent you receive.

[marcjy1]

Thank you very much, I had no idea of any of this. My niece and I are the only two in the house.

My niece rented from me for 84% of 2019. So I am going to use 84% of expenses for Schedule E.

Additionally, I will cut those expenses in half to account for my personal use.

That will most likely place total expenses close or below her total amount of rent.

Is what I am doing correct?

[marcjy1]

Thank you for this valuable information.

FMRV last year was $786 based on half of home values I found online. But, in reality, room rentals in the senior citizen complex in which I live are not advertised. They are word of mouth, signs in windows, etc.  Based on word of mouth, they usually rent for perhaps $650 to $700.

My niece pays me $500 rental. Would you consider that substantially below FMRV? If so, and I state that in my tax return, would that raise a red flag with IRS?

This rental amount was recommended to her by her attorney's office who represented her in her SSI hearing. It had to be a reasonable amount so as not to strip her $900 per month SSI stipend. So, SSI accepted that amount in a rental agreement between me and her.

[Hal_Al]

Q. My niece pays me $500 rental. Would you consider that substantially below FMRV?

A. Close, could go either way. But it doesn't matter. See next question.

Q. If  I state that in my tax return, would that raise a red flag with IRS?

A. You can't raise a red flag, because you can't claim a loss. The only time a red flag is raised is when you try to claim a loss by renting below FMV to a relative. 

[marcjy1]

I'm sorry, but I don't understand completely. Why can't I claim a loss?  As an example, if I divide expenses 50/50 between me and my niece given that she has full run of my home and I of course have personal use, resulting in $6000 expenses versus $5000 rent, why can't I claim a loss?  

[Hal_Al]

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income.

[marcjy1]

I guess I thought taking 50% off total expenses would account for my personal use of my home given that there are only 2 of us in my home.

So I should make sure that total expenses on schedule E are below total rent?

[Hal_Al]

Yes, you should make sure that total expenses on schedule E are below total rent.  TT will not do that for you.

[marcjy1]

All right, trying to get out of your hair. A couple final questions. My total expenses will actually be around $10,000 versus $5,000 rent. Can   I divide the $10000 in half to account for my personal use? If I don't do that, I will never get down to the rental amount and make sure it will be under $5000.