Rent out a room with Depreciation related question

[kakafreedom]

Hi,

I rent out 2 room out of my 4 bedroom home. Is it okay if I deduct all the expense 50% based on the number of room? or I should go with the square feet calculation. 

I know that I can depreciate the house on schedule E for 50% of the depreciation value. I know depreciation will come with the cons --> the recapture thing later if I plan to sell the house. However, I did some more research and seem like depreciation is not a choice, even I don't do depreciation now, IRS still considered it as detailed  below

“If you were entitled to take depreciation deductions because you used your home for business, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997.” 

My question is I do not rent out the whole property, it's my primary home not a rental property but I do rent out part of it, will I considered that used my home for business and above rule will apply?

Just trying to figure out if I should do the depreciation or not.

Last question about the house expense such as property tax, PMI, interest. I file those cost in Schedule A and therefore I can't put it again in Schedule E. However, what is the best practice here?

Thanks

[ColeenD3]

Yes, since you rent out a portion of your home, it is now 50% business property and 50% personal. It is your choice is you want to do it by rooms or square footage.

You would divide each expense. However, some expenses might be strictly personal and therefore not deductibe. On the other hand, if you were to paint the tenant's rooms and not your own, then that is a 100% business expense.

In addition, any space that is shared can't be included in the rental portion.

Yes, you must depreciate. There is an area in the program where you can indicate if you want TurboTax to do the math or if you would rather do it.

[kakafreedom]

Can I use the 50% for all the expenses like utility bills/cable/HOA if I do it by rooms.

So depreciation is not a choice? if I don't do it, it's just considered as my loss?

[ColeenD3 · Accepted solution]

Yes, all those that are an expense to get the rental income are deductible at 50% for the business portion. It doesn't matter which method you choose.

If you don't take depreciation, you have to recapture it anyway, so yes, you would lose.

[Carl]

Apparently, there must be some change to the laws on this that I can't find in IRS Publication 527. From what I read (beginning on page 16) while you can use any reasonable method, renting out just two bedrooms in one's house doesn't come anywhere close to 50%.

But the one thing that I do notice is now missing from the 2019 version of the publication, is the "exclusive use of the renter" clause.

Also, there's no mention of splitting costs between SCH E and SCH A by any method other than either;

 - Percentage of total square footage (for figuring mortgage interest, insurance and property taxes)

 - Percentage of people in the house that are renters.(for splitting utility costs)

On the matter of utilities, it does specifically state that you can't prorate one penny of the telephone bill to the SCH E for the "first" phone line in the house. So if there's only one telephone line to the house, you can't claim a penny of the phone bill as a rental expense.

So if you have a three bedroom house and you're renting out two of them, I don't see how splitting things at 50% would be "reasonable". This seems to be a rather grey area in the publication since "reasonable" is not clearly defined. In fact, it's not even vaguely defined.

The closest thing to clarification is the very first paragraph of that section which states:

"If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property"

I think the key words there are "as though you had two separate pieces of property". That to me seems to be the replacement for "exclusive use of the renter." Now the "Certain Expenses" it defines for the above, are the mortgage interest, property taxes and insurance.  On the insurance front it also indirectly insinuates deducting the insurance or portion of insurance that you pay for the "business use" of a part of your home. So this seems to be yet another grey area that leads me to believe you need a separate insurance policy for this.

Now I do know for an absolute fact that the standard homeowner's policy does not cover business use of the property. So if for example there is a fire and it's caused by a paying tenant or occurs in one of the rental bedrooms, that fire occurred at a time it was not being used for it's insured purpose. That's how the insurance company gets out of paying the claim, and they will be successful in doing so.

But if you either got a rider on your existing policy, or a completly separate policy to cover any damages related to the business use of the property, then the cost of that rider or separate policy would be a 100% rental insurance deduction with no prorating required.

[marcjy1]

I am so glad I found this thread. I want to make sure I understand especially in light of the changes you have discussed.

I own my home, pay a mortgage, and rent one room in my two bedroom duplex to my niece who is on SSI and with whom I have a rental agreement on file with SSI.

There are only two of us in my home. She has full run of the home. Therefore, I have used 50% of my home as used for business purposes and have divided Schedule E expenses by 50% as well.

I am trying to be careful not to let my home revert to personal use given that my niece is a qualifying relative. As I understand it, it is a different ballgame when you are renting to a family member, personal use issues arise in this situation. I rent to her at fair rental value.

I will also claim her as a dependent again.

I hope I am doing all this correctly.  ??

[AmyC]

The renting out of rooms has changed much in the last few years. The room she rents from you has zero personal use to you. The rest of your home, is your home that you are letting her use.

Traditionally, you based everything on that one room that was not available to you. The landscape and laws are evolving.

@Carl and I are both wary of what these changes will look like after some court cases.

You are claiming her as a dependent? Saying you provide over half of her support? Please review what is considered support and be sure you can prove that. Please use Worksheet for Determining Support. Particularly since she is paying you rent.   Use this online tool  to be sure you can claim your niece after the worksheet, Filing Status, Dependents and Exemptions 

[marcjy1]

Thank you, I did use the worksheet and I am providing more than 50% of her support.   

Am I correct in applying 50% of my home for business purposes. And also using 50% of expenses on Schedule E?

[ColeenD3]

As mentioned above, it is not 50/50. Any space that is available to you both is your personal portion. Only "her room" and possilby her bathroom is the business portion, assuming it is not open to use by you.

Originally in my response, I improperly assumed it was 50/50 based on the "two of 4 rooms". I did not probe further to see exactly what the shared space was.

[kakafreedom]

so if understand it correctly...

• the space has to be calculate using sqrt ft? and only count for her room and bathroom. the proportion of that will use to calculate for mortgage, insurance etc.
• the utility bills, can I use the count per room? if it's 4 bedrooms and I rent out 1 room will it consider 25%? 

[AmyC]

Your house is bigger than just those 4 rooms.You can not count one -fourth of the utilities. That is why they want you to use the square footage. You could have a 5 room house or 25 room house, either way with 4 bedrooms. Do you see the huge difference in the utilities for one bedroom between the 2 scenarios? Square footage has been the test.

[kakafreedom]

so all the calculation will be based on sqrt ft only ?

[AmyC]

Yes, that is how it has been done traditionally. If there is a bathroom or other space that is exclusively for the renter, it counts in the square footage.

[Carl]

• the space has to be calculate using sqrt ft? and only count for her room and bathroom. the proportion of that will use to calculate for mortgage, insurance etc.

Yes. You should be able to find the total square footage of the house on your local property appraiser's website. For example, my house is appraised based on 1825 sq foot of living space. One of my 4 bedrooms is 12 X 16 which is 192 sq ft. The closet in that room is 3ft by 4ft which comes to 12 sq ft. So the total space that is exclusive to the renter is 204 sq ft so far.   I have 3 baths in my house and one of those baths is only accessible from the aforementioned bedroom. So that bath is exclusive to the renter. It measures 8ft by 10ft which is another 80 sq ft. So total space exclusive to the renter is 284 sq ft, which is 15.56% of the total floor space.

Based on that, 15.56% of my insurance, mortgage interest and property taxes can be claimed on SCH E. The difference is a SCH A itemized deduction.

• the utility bills, can I use the count per room? if it's 4 bedrooms and I rent out 1 room will it consider 25%? 

Not quite...at least not per my understanding and interpretation of the IRS pub.

For starters, I only have one landline telephone in my house. None of that is deductible on the SCH E because the use of that one telephone line is not exclusive to the renter. Doesn't matter if I have an extension phone in the renter's room either.

For cable, there's myself and my wife. A renter would make a 3rd person. If I actually have a working cable connection in the renter's room, then I can claim 33% of my cable bill as a rental expense. There's nothing that clarifies this, but it appears I can claim this weather the renter actually uses that cable drop or not.

For water and electricity, I can claim 33% of those bills on SCH E since each occupant in my house uses 33% of those utilities on average.

For internet, there's really no clarity here at all. But if you have wireless in your home and you do make it available to the renter (and I would assume they would also need the means to actually use that Internet) I see nothing that would prevent or prohibit me from claiming 33% of that internet cost as well.

This can get tricky when you have bundled services. For example, land line, internet and TV through a cable provider. You'd have to separate out the land line since you can't claim your telephone on SCH E, and then claim 33% of the remaining.

Overall though, I've never even heard of anyone being audited on this stuff. Yet I can't claim that it's never happened to someone and I certainly can't claim that it won't happen either. Generally for an individual to get audited there has to be something that "sticks out" on a tax return. For example, if you claim $30K in cotributions to a qualified charity when in the past you've averaged say, $1000 a year. Or if you have a sudden and drastic change in income that not reported on the tax return, yet your return indicates a drastic change in lifestyle. (Like moving from that $150,000 house into a multi-million dollar mansion.) That can and does happen when someone gets a large inheritance from that rich uncle who passed away that tax year.

Bur for us "normal" tax payers like you and me, about the only way we get audited is if our number comes up on those random draws the IRS does at times.

[marcjy1]

The thread is highly educational and I thank you. Are there any additional rules of which I am not aware due to the fact that I am renting to a qualifying relative as opposed to a non-relative? I know I have to be careful to rent at Fair rental value which I am doing and to avoid things such as gifting.