Rental Expenses for A Roommate in Different Year then Rental Income

[sweetkiva]

I spent several dollars to fix up a room to rent, listed the room on a website, credit checks, etc., and met with several prospects in 2022 but I didn't actually lease out the room until January of 2023. 

1. Can I expense the expenses on my tax return in 2022 even though there was no income yet until 2023?

2. I'm sure I can expense 100% of any expenses related directly to renting the room out and fixing it up. But, going forward in 2023 where I have rental income now, I have 3 bedrooms and I'm renting one out, can I just split all the expenses since it's two people total or can I only expense 1/3 since it's 1 of 3 bedrooms? For example water, mortgage, power, etc.

[Carl]

Rental expenses are those expenses incurred starting on the date the property is placed "in service". It's considered to be in service on the first day a renter "could" have moved in. So if the room was "Move in ready" on say, Dec 1, 2022 then that's the "in service" date. It's no problem to claim any/all expenses directly related to the rental activity that were incurred on/after that date. Doesn't matter if you have zero income and zero days rented. So long as the property was "available" to a renter on said date, and you can prove it if audited, this isn't an issue. Understand that I seriously doubt the IRS would audit on this, unless your 2023 tax return showed no income and rented zero days for the entire 2023 tax year.

There's different types of expenses too.

Repair expense - deductible only if incurred while the property was classified as a rental.

Maintenance expense - deductible only if incurred while the property was classifed as a rental.

Property improvement - not deductible directly. improvements get capitalized and depreciated over time, with depreciation starting the first day the property improvement was placed "in service". it also doesn't matter if that improvement was done before or after the rental was actually placed in service. It still retains or adds value to the property regardless of when it was done.

Common question: I paid for the advertising before the property was actually placed in service? So can I still claim/deduct that on SCH E?

Simple answer: YES.

[DaveF1006]

Yes, according to IRS Publication 527, If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. This includes a room. All advertising and credit checks may be deducted as well as simple repairs such as painting the room to make it habitable are also deductible. 

No you cannot split the expenses 50/50 but only expenses that relate to the room.  I know this is a dicey subject but the best method of allocating costs is to take the square footage of the bedroom and divide it by the total square footage of the house. From this calculation, you have a ratio in allocating expenses between you and your renter such as utilities, property tax, water, mortgage, etc. 

@sweetkiva

[Hal_Al]

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.

Here’s what you may be required to do:

Report the income (enter at Rents & Royalties/Income & expenses from Rental Properties); and then deduct the expenses on schedule E. If the room mate has full run of the house, and there's just the 2 of you, then half your expenses are deductible (mortgage interest, property taxes, insurance, utilities, repairs, and depreciation [if needed}). Your net income will usually be less than zero.

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.