Percentage of Expense Deductions when Renting Out a Room

[Anonymous]

My primary residence has five rooms and I rent out one bedroom. The roommate has access and can use the other two rooms which are for storage and home gym. The office and my bedroom are exclusive for my use. The rest is public area for shared use like living room and kitchen.  What's the percentage of expenses (e.g. maintenance and cleaning) can I allocate for rental purpose to reasonably max deduction? If strictly based on the number of room rent out, it would be 20% (one out of five rooms). If based on rooms for exclusive usage, it would be 33% (one out of three rooms - two rooms exclusive for me and one room exclusive for my roommate) . Is the 33% reasonable for expense deduction purpose? 

Another question is even though the room is always available for rent, there is time it's vacant in between changing roommates. I wonder if I could still allocate the expenses 365 days, or only the days the room is rent out? Since the maintenance of the house is a year-round work and the room is always looking for tenants, I wonder if I only need to take out the utility from the expense when the room is vacant?

Thank you!

[MonikaK1]

If the rooms you rent out are always kept available for rent, even when vacant, then you can consider them in use for rental purposes all year.

Where TurboTax asks, "Do any of These Situations apply to This Property"

Select "I rent out part of my home".

If you mark the box "yes" for TurboTax to allocate per the percentage of the business portion of a mixed-use property, the expenses are only entered one time in the rental section and TurboTax will allocate correctly to personal Schedule A and rental to Schedule E according to the percent you entered.

Only include the rooms exclusively used for rental in the rental area percentage.

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.  

See the section and example under Renting Part of Property in this IRS article.

[Anonymous]

Thank you very much for the advices!

I currently split the utilities between me and my roommate since there are only two of us living in the house. I always only have one tenant at a time. Since the room is in use for rental purposes all year (but not always occupied), can I still use half of the annual utility expense for deduction, or only 1/5 of the annual utility expense since only one room out of 5 rooms is available for rent, or  should I only deduct half of the utility expense on the days when I actually have a roommate?

Also just to confirm if I understand correctly, even though the roommate has access and can use the other two rooms in my house besides her own bedroom, the two rooms can't be considered as public area? In the other word, I could only apply ratio of 1/5 instead of 1/3  (one room out of three rooms that are for exclusive use) for deducting expenses?

[PattiF]

You should deduct half of the utility expense when you have a roommate renting the room.

Yes, you are correct that the two rooms in the common area cannot be considered a rental area. Only the exclusively used area is considered a rental area. The common area is available to all and is not a factor in the allocation of expenses.

@Anonymous 

[Carl]

Basically, the percentage of your floor space that is classified as rental, is the percentage of space that is "exclusive to the renter".

When it comes to the utilities, you actually have two choices on how to figure those.

One way is to claim the percentage of utilities cost (water, electric, cable, heat, etc.) that is equal to the percentage of floor space that is exclusive to the renter.

Another way is to divide the utilities by the number of people living in the house. You live there as the owner, and you have a paying tenant occupying say for example, 10% of the floor space. With two people sharing the utilities, you can claim 50% of those utilities on SCH E. If you are married then you wife lives in the house also. With a tenant that would make three people. Then you could claim 1/3 of your utility expenses on the SCH E.

You can pick the way that's most beneficial to you, and you don't have to use the same method each year when it comes to the utility costs.

The percentage of floor space that is exclusive to the renter matters, mostly for the mortgage interest deduction, property tax deduction, and property insurance deduction you can claim on the SCH E.

One thing to note. If you have 2 or more baths and one of those baths can only be accessed from the room that is exclusive to the renter, then you can include that bath when figuring your percentage of floor space. Every little bit helps.

Now, if 2022 was the first year you did this, my bet is that the first year depreciation will be wrong. If it is wrong, let me know and I'll show you how to make it right without having to do an over-ride, so you can still e-file.

To confirm the depreciation, see IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf  Then use the MACRS worksheet that starts on page 37. For line 6 of that worksheet, you'll use table A-6 on page 72.

[Anonymous]

Thank you very much for your responses! @Carl @PattiF 

I just read in the other posts that bathroom accounts as "room" too. My house has 5 bedrooms and 2 bathrooms. I've been renting out the master bedroom which has its own bathroom. In the other words, the rental area includes one bedroom and one bathroom. Should the percent for deduction be 2/7=28.6%? 

This is not the first-time I rent out the room/house. Unfortunately, I just realized I should report depreciation which I didn't. I didn't want to recapture the depreciation at sale so I didn't report it. But apparently the depreciation will be recaptured not matter I report it or not :( Should I just report 2022's depreciation as part of the 2022's tax return, and amend the previous years' tax returns seperately?

[Carl]

My house has 5 bedrooms and 2 bathrooms. I've been renting out the master bedroom which has its own bathroom. In the other words, the rental area includes one bedroom and one bathroom. Should the percent for deduction be 2/7=28.6%? 

If the 2nd bath is exclusive to the renter, you can (and should) include it in the percentage of rental space.

 I just realized I should report depreciation which I didn't. I didn't want to recapture the depreciation at sale so I didn't report it. But apparently the depreciation will be recaptured not matter I report it or not :(

Correct. When you sell the property you are required to recapture all depreciation taken, or the depreciation you "should" have taken. So you lose either way.

Should I just report 2022's depreciation as part of the 2022's tax return, and amend the previous years' tax returns seperately?

Assuming 2021 was the first year you rented out the room/property, you should amend the 2021 tax return first, before you even start your 2022 tax return. That's the only way you can ensure the correct amount of "prior year's depreciation" is imported into the 2022 program. If you don't account for the prior years depreciation on your 2022 tax return, then your depreciation for 2022 will be wrong.

[Carl]

My house has 5 bedrooms and 2 bathrooms. I've been renting out the master bedroom which has its own bathroom. In the other words, the rental area includes one bedroom and one bathroom. Should the percent for deduction be 2/7=28.6%? 

If the 2nd bath is exclusive to the renter, you can (and should) include it in the percentage of rental space.

 I just realized I should report depreciation which I didn't. I didn't want to recapture the depreciation at sale so I didn't report it. But apparently the depreciation will be recaptured not matter I report it or not :(

Correct. When you sell the property you are required to recapture all depreciation taken, or the depreciation you "should" have taken. So you lose either way.

Should I just report 2022's depreciation as part of the 2022's tax return, and amend the previous years' tax returns seperately?

Assuming 2021 was the first year you rented out the room/property, you should amend the 2021 tax return first, before you even start your 2022 tax return. That's the only way you can ensure the correct amount of "prior year's depreciation" is imported into the 2022 program. If you don't account for the prior years depreciation on your 2022 tax return, then your depreciation for 2022 will be wrong.

[Anonymous]

Thank you a lot! My rental situation is a little compilated.

In 2019, I rented part of the house less than 14 days on Airbnb. I didn't report rental income bc it's less than 14 days. Should the depreciation start in 2019 when I first listed the property for rental even though I didn't need to report rental income?

In 2020, I started renting out a room, then switched to rent out entire house on Airbnb. I guess my depreciation varies based on the square footage I rent during the year? 

In 2021, I started only renting out the master bedroom consistently. The depreciation of 2021 should be the same as the 2022 since the master room is available for rent throughout the year and exclusive for guest use.

[Carl]

I guess my depreciation varies based on the square footage I rent during the year?

Yes it does. TurboTax can not correctly handle this complex situation. I would highly advise you seek the services of a local CPA or EA. Especially if your state taxes personal income. Using TurboTax, the program can not correctly figure the depreciation year to year, since it continues to fluctuate.

[Anonymous]

I agree it's best to hire a CPA to make the amendments. I just consulted a CPA friend, who suggested me starting depreciation this year since the cost for amendment (hire CPA) is likely to exceed the depreciation (tax saving). Is it OK that I reported rental income in the past years, but hasn't started depreciation until this year? When TurboTax asks "is this the first time you rent out this place", may I just say "Yes" so it would calculate depreciation starting in January 2022?

[Carl]

You can do what you want, obviously. Now I'm not trying to scare you or anything here. A lot of folks make mistakes on their returns and never get audited or called out on it by the IRS. Just keep in mind that as far as the IRS is concerned, you, and only you are responsible to the IRS for the accuracy of your return. Not TurboTax, and not a CPA from the IRS perspective.

While TurboTax does offer a 100% Accuracy Guarantee, that only pays your fines and penalties when assessed. You are still responsible for any additional taxes. If you get audited, and you haven't pre-paid TurboTax for Audit Defense, it can (and will) get costly. But even with Audit Defense, you are still responsible for any additional tax that may be due, from an audit.

[Anonymous]

Thank you Carl! Appreciate your advices 🙂