How do I calculate deductions for 3 bedroom guest house where I am a live-in host and common areas are shared?

[Reachn4dreams]

I own a 4 bedroom home that I had to convert to a guest house or lose it due to losing my job and going on SSDI.   I have lots of questions, but most importantly:

 ? The square footage the county has for my house is not accurate. Is it ok to use different numbers?

? what specifically is the calculation I should use to get the best deductions? Is it?

       sq ft of guest rooms

     + sq ft of exclusive bath

     + % of common areas (what is the percentage I should use?)

     + sq ft home office + storage? (I use more than 350 square feet for this. Is it true that I can only use 350sqft? How is this calculated into the equation?)

      * Number of days available for rent (365 days)

2nd Floor	Square Footage
Guest Room 1	111.22
Guest Room 2	117.36
Guest Room 3	124.13
Guest Bath (exclusive to guests)	Not determined yet
Guesthouse storage closet
1st Floor
Kitchen
1/2 Bath
Laundry
Living Room
Dining Room / Library
Back Yard
Hot tub
Inground pool
Deck
Patio
Firepit

2nd floor contains:

* 3 guest bedrooms (used exclusively by guests). Square footage for each room is below and the total is 352.71.

* 1 full bath (used exclusively by guests)

* 1 storage room (used exclusively by me for guest room supplies (extra sheets, pillows, cots, floor mattresses, seasonal blankets, extra toilet and facial tissue, paper towels,.... )

* A long balcony/catwalk that opens to the 1st floor and connects the guestrooms to the stairs.

1st floor contains:

* kitchen, livingroom, dining room, library, laundry, 1/2 bath (fully shared / common) 

* My bedroom and bath (used exclusively by me)

Backyard contains:

* the hot tub, pool, deck, firepit, etc. (fully shared / common) 

Note: I definitely use over 350 square foot of my home for:

* a "home office"

* a large "storage room"  for guest room supply storage 

* part of the garage for guest room supply storage 

* part of the basement for guest room supply storage

[Vanessa A]

? The square footage the county has for my house is not accurate. Is it ok to use different numbers?  Yes, you want to use accurate numbers.  If the county has the wrong numbers, you should not use the counties numbers. 

? what specifically is the calculation I should use to get the best deductions? Is it?

       sq ft of guest rooms

     + sq ft of exclusive bath

     + % of common areas (what is the percentage I should use?)  The percentage would be based on number of rooms vs tenants.  So if you are only using 1 bedroom and your tenants are using the other 3 bedrooms, then you would allocate 75% to the common areas. 

 + sq ft home office + storage?  Yes, the above would be the calculation to determine how much of the house is used for rental.  

Your home office must be used regularly and exclusively for the rental and as business.  If you use it to pay your personal bills or do online classes, it does not meet the Home Office exclusive use criteria so you would not be able to deduct it as a home office. 

 (I use more than 350 square feet for this. Is it true that I can only use 350sqft? How is this calculated into the equation?)  The 300 Sq. ft. is if you are using the simplified method. If your actual home office is larger and you are using the percentage of your home method, the sq. footage rule does not apply. 

Yes, the number of days available would also be a part of the calculation. 

[Carl]

I am not in agreement with @Vanessa A on figuring the square footage percentage. You need to read IRS Publication 527, page 16, "Renting Part of Property".  As I understand it, when it comes to the actual square footage of space used to figure the percentage of that space, the percentage of floor space is that square footage that is "exclusive to the renter".  Common areas share by paying tenants and the owner are not included.

Also note that there are two common ways to split common expenses (like utilities) covered in that section. Doesn't hurt to figure both ways to see what works best for you. The method used can also be changed each year.  Of special note is that if you only have one landline telephone on the property, then none of that cost is allowed to be deducted as a rental expense.

For any part of any utility costs to be deductible on the SCH E, the tenant must have access to it. For example, the tenant obviously has access to water since they need to bathe on a daily basis. However, the tenant may not have access to cable TV if they don't have a place to plug in and hook up their own TV. But if they do have access to cable (such as a cable drop in the room they are renting), then you can allocate some of that cost to the SCH E weather they actually use that cable drop or not, and weather they actually have a TV to plug into that cable drop, or not. They have "access", and that's all that's necessary.  But still, when it comes to a hard wired telephone, IRS Pub 527 clearly states "You can’t deduct any part of the cost of the first phone line even if your tenants have unlimited use of it."

[Reachn4dreams]

"Exclusive to Renter"... What if an area is exclusively used "for" renters? For instance, My entire 2nd floor is Exclusive to Renters, except for a storage room which is exclusively for the rentals. Extra sheets, pillows, tissues (toilet and facial), blankets, pack & plays (cribs), cots, floor mattresses,  cleaning supplies, etc. Is this considered part of the "rental spaces" or part of my "home office"?

[Reachn4dreams]

Just a clarification... The guest rooms are fully furnished with tvs with streaming channels, a refrigerator, etc. I provide all the sheets, blankets, towels, robes, slippers, lotions, shampoos, soaps, etc.

[Carl]

What if an area is exclusively used "for" renters?

If 'you" use the space for anything non-rental related, then it's not exclusive to the renter.

An example would be if the house only had 1 bathroom. There's no way that bath is exclusive to the renter.

If the home has two baths, and one of those baths is only accessible from the renter's room, then that bath is also exclusive to the renter. Whereas if that 2nd bath was across the hallway from the renter's room, you can "make" it exclusive to the renter if you don't use it. But I don't know how you'd prove it. But lets get real. I also don't see an IRS audit agent walking into your house and asking you to prove it either. 🙂

Also be aware that a "home office' Is not allowed for SCH E rental property. There's absolutely no provision for a home office for SCH E rental property that I can find. (At least, not residential rental property, as I've never really looked that close at the laws for commercial rental property.)