I rent out a room in my primary residence. While I actively manage this room rental, am I allowed to deduct a net loss since I use it for personal use as well?

[danieljsmith-012]

For example, should I select "no, I am not an active participant in this rental property" when prompted by turbo tax? If so, will the not loss I could have deducted this time be rolled over into another year?

[Carl]

For example, should I select "no, I am not an active participant in this rental property" when prompted by turbo tax?

Absolutely not. That would be a lie and you would be committing tax fraud.

If so, will the not loss I could have deducted this time be rolled over into another year?

That's how it works with rentals. It is extremely rare for rental property to ever show a profit "on paper" at tax filing time. Since rental income is passive, rental expenses (including depreciation) can only be deducted from that passive rental income. Once those expenses get your taxable rental income to zero (they practically always do) any remaining losses are carried over to the next year.  As the years pass, you'll note that your carry over losses will just continue to grow and accumulate.

You can not realize those losses until the tax year you sell or otherwise dispose of the property.  In the year you sell here's how it works for any gain realized on the sale.

 - First, all prior depreciation taken is recaptured and taxed anywhere from 0% to a maximum of 25%. This is required by federal law.

 - Next, all unrealized losses are deducted from the sales gain, thus reducing the taxable portion of any gain you may have realized.

 - If unrealized losses reduces your taxable gain on the sale to zero, then any remaining losses are deducted from other ordinary income, such as W-2 income.

You can claim a maximum of $3000 against other ordinary income. If you have more than that, then it's just carried forward each year until all used up.

[Hal_Al]

Q. Am I allowed to deduct a net loss since I use it for personal use?

A. No. And you have identified the reason: you have personal use.

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.

Even if you report the rent received as income (on Sch. E), your deductible expenses will most likely exceed your income, so you'll have no net taxable income.. Because this is your personal residence (in addition to being a rental property); and you use it most of the year (the 14 day or 10% rule), you are precluded from claiming any rental losses. You are only allowed to deduct expenses up to the amount of the income. Almost everybody in your situation comes out with a zero sum for tax purposes.

 

[blake1995ross]

I am working on my 2021 Tax Return and am slightly confused on this still. If you rent out a room in a primary residence I believe you cannot record any net loss, correct? So don't you want to select "No, I am not an active participant in this rental property" In order to make sure your losses are not used against your other income? If you select that you are a active participant TurboTax will generate a net loss that is deducted from your other income.

[Hal_Al]

That would be one way to limit the loss to zero.  

The other would be to only enter expenses up to the amount of income

[AmeliesUncle]

Follow the directions in TurboTax, and it should do it correctly.   Be sure to properly enter the number of personal days and rental days.  Just because there is personal use does not necessarily mean that you can't claim a loss.  

[Hal_Al]

@AmeliesUncle   said "Follow the directions in TurboTax, and it should do it correctly". 

I have been unable to get it (TT Deluxe desktop) to eliminate  the loss. 

AmeliesUncle said "Just because there is personal use does not necessarily mean that you can't claim a loss".  

Do you have a reference for  that? 

[AmeliesUncle]

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@Hal_Al wrote

AmeliesUncle said "Just because there is personal use does not necessarily mean that you can't claim a loss".  

Do you have a reference for  that? 

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The personal use is likely making it non-passive, which MIGHT allow a loss:

The following aren’t passive activities ... The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.

https://www.irs.gov/publications/p925#en_US_2021_publink[phone number removed]

But then the "Vacation Home" rules set in which may not allow the loss.  But if the rental-only expenses (advertising, commissions, management fees and "other expenses") exceed income, then a loss would be allowed.

I don't know the specifics of the OP's situation (or what you entered on your test tax return), so maybe my comments above don't apply to your specific situation.  But in prior years, TurboTax did that part correctly.

[Max morter]

In this case if I own the home and rent 2 rooms out can I also deduct month's as a loss that have no Tennant in said room

[Max morter]

Also how to calculate depreciation 

[Mike9241]

i) note that the following does not apply to cost sharing arrangements.

ii) also note that if isn't a cost sharing arrangement any day rented to anyone at less than fair rental value is considered a personal-use day 

IRC section 280A  contains the rules  of disallowance of certain expenses in connection with business use of home, rental of vacation homes etc

A) was personal use of property more than the greater of (1) 14 days or (2) 10% of rental days  

B) if A is no was property rented or held out for rent (ii applies) 

B1) if no only the mortgage interest and real estate taxes are deductible and then on schedule A not E  rental income and expenses are not teported 

B2) if yes prorate expenses. there are two methods a) the general method - days rented to days occupied (Bolton, 51 AFTR 2d 83-305(9th cir 1982) and b) the tax court method - mortgage interest and taxes (and one would assume depreciation) are prorated based on days rented to days in year. other expenses use the general method

C) if A is yes was property rented less than 15 days (ii applies).

C1) if C is yes residence is treated as 100% personal. rental income and expenses are not reported. Mortgage interest and taxes on schedule A 

C2) if C is no prorate expenses

how to compute depreciation

use the lower of cost or Fair Market value of property

separate out the land cost or value on the building is deprciablle

use the square footage of the bedroom rented to the square footage of the whole building

you may want to see the following. in this case the taxpayer ran a B&B a portion was pure business use, another portion pure personal use and a portion (dual-use) used at various times personally at other time for business. The taxpayer took a prorata portion of depreciation on the dual-use portion. The court disallowed depreciation on the dual-use in its entirety. 

https://bradfordtaxinstitute.com/Endnotes/TC_Memo_2006-33.pdf