Part time rental to roommates - Snowbirds

[MySharonA]

Hi, I own my primary home that my college child and roommates live in during the school year.  We charge the roommates rent.  During the summer months, my husband and I come home and live in the home (along with our child.  She lives there year round).  We consider this our primary home.  We have a second home in another state where we spend the winters, and we RV and stay with friends until the roommates move out for the summer.

Question:  How do I fill out the Schedule E for this scenario, and how is the roommate income treated?  

[Carl]

There are a few ways to do this. I"m only discussing the way I recommend, based solely on the information you've provided.

Note that when you start working through the SCH E section, one of the three items you will select on a specific screen is the one to indicate you rent a part of your home.

Next, you have to figure the percentage of floor space that is "exclusive to the renter(s)" and claim that percentage as the rental portion. For the sake of simplicity, lets say it's 25% of your floor space is exclusive to the renter(s).

Now there's two questions that need clarification.

One question asks what percentage of floor space is exclusive to the renter. In my scenario, that would be 25%.

The other question asks what percentage of time that space was used in the business. Assuming it's only a total of 9 months of the year, that would be 75% of the time it's used for business. Now assuming 2022 was your first year, most likely you started renting it in the August-September time frame. Assuming you converted that space to a rental space in the Aug-Sep time frame, the business use percentage that first year would be 100% with no personal use days.

For the next tax year, you leave it classified as a rental for the entire tax year. Then you report your days of personal use and days rented. That will pro-rate your expenses accordingly.

When you complete the tax return for 2022 you "need" to confirm beyond any doubt the the correct amount of depreciation was taken. Getting this wrong *WILL* screw things up for the future, big time. To confirm the correct depreciation use IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf.  Use the MACRS worksheet on page 36. For line 6 of the worksheet, table A-6 on page 71 applies.

Failure to get the depreciation correct that first year, *will* cost you dearly down the road when you sell the property in the future.

[MySharonA]

Thank you for your suggestions.  

[MySharonA]

I have a follow up question. When our child graduates in May 2025 we will cease the roommate rental situation. Since this is temporary, I had not planned on depreciating or claiming any expenses. Does this change your recommendation?  Thank you 

[Carl]

For starters, there's nothing temporary when renting across tax years. When renting, if you do not depreciate, you pay the price later. That's because when you sell or otherwise dispose of the property in the future, you are required to recapture and pay taxes on the depreciation taken, or the depreciation you "should" have taken; whichever is higher. Two things about recaptured depreciation.

1.) Recaptured depreciation is added to your AGI in the year of recapture. This has the potential to bump you into the next higher tax bracket. It just depends on the numbers.

2) Recaptured depreciatin is taxed at the ordinary income tax rate which could be anywhere from 0% to a maximum of 25%.

Not claiming qualified expenses just makes no sense. Over 4-5 calendar years that's going to add up to quite a bit, and it could help big time in the tax year you sell the property.