Renting bedrooms tax question

[d7knight]

I followed the IRS worksheet that you referenced in the irs publication and line 15 was almost identical the value which turbo tax is using for depreciation. Within $1

[Carl]

I expected it to be less than $2 difference. So it looks like you're good to go. I would suggest  you "sit on it" for about an hour or more before you e-file, just in case an "oh I forgot something!" moment strikes. Otherwise, if you need to amend you really can't even start the process until after your currently e-filed and accepted tax return is processed completely. That can take a few weeks.

[vinceation]

@Carl Really appreciate your thorough explanations to this question from last year. I'm having trouble in a similar way this year with TurboTax Online's line of questioning -- it is clear to me the depreciation value being calculated is on 100% of my property, not on the 25% it should be (I rent out 25% of my home). I wonder if language has changed slightly from last year?

I'm not seeing any page entitled "Asset Summary", or a way to fill in a "percentage of time I used for this business" (as a way to trick the software by filling in "percentage of home rented"). Instead, I'm seeing a chance to enter "number of days for rental use" and "number of days for personal use" together. When I try to trick the software as you recommended (entering 91 days for rental, a.k.a 25% of 365, and 273 for personal, a.k.a. 75% of 365), the software automatically prorates all of the expenses I manually entered.

What are my options here? Am I missing something in this year's software that has fixed the problem you wrote about here last year? Or should I put in the full (100%) amounts on each expenses, let the software prorate them based on the 91 days I entered (even though it wasn't 91 days, it was 365 days of 25% of my home) -- would I then end up with correct expenses and depreciation? Or would something still be off?

Thanks!

[Carl]

@vinceation Number of days of rented will be the number of days rented. Plain and simple.

Number of days of personal use will be ZERO. It's asking for the number of days of personal use of that 25% converted to a rental, *after* you converted it to a rental. So that will be ZERO. If you make it anything more than zero, that "will" affect the total of your rental expenses for that 25% that you are allowed to deduct, and it will also reduce the amount of depreciation you are allowed to take on that 25%.

Hopefully, that gets you on the right track now.

[vinceation]

Thanks @Carl. I think I need to provide a little more context. My specific issue is that I began renting 25% of my home this year (the other 75% is personal use), and although TurboTax can correctly calculate all of the way expenses are affected by that 25-75 split, the depreciation / asset calculations are definitely too high (which is what brought me to your comment 👆 from last year) — the software is clearly calculating depreciation for 100% of my house, not 25%. Any ideas on what to do with this?

[Carl]

Hang on. I'm working it through my desktop 2022 version of the software.

[Carl]

Okay, I've worked it through and it really doesn't appear much has changed. Here's the steps, assuming you have already entered the asset in the Assets/Depreciation section.

- In the Assets/Depreciation section elect to edit the asset.

- On Describe This Asset, select Rental Real Estate Property and continue.

- On Tell Us A Little More...." select Residential Rental Real Estate, and continue.

- On Tell Us About This Rental Asset, enter the description, cost, cost of land, and the date you "originally" purchased the property. Then continue.

- On Tell Us More About This Rental Asset, select that you purchased new, and no, I have not always used this item 100% of the time for business.

 - Still on the same screen, enter the date in 2022 that you first started using this as a rental. Typically, this is the first day a renter "could" have moved in, and this date needs to be the same date you entered earlier, (If you were asked this same question earlier.)

 - Now at the bottom where it asks for percentage of time, do *not* enter percentage of time. Instead, enter percentage of floor space. Then continue.

The figures "should" be right now, presuming you elected to have the program "do the math for you" at the start.

If the depreciation is not right, then you most likely elected to do the math manually yourself. In that case, for your COST and COST OF LAND, you would enter 25% of your cost basis for those items. (Assuming you have converted 25% of your floor space to rental.) Remember, COST OF LAND *is included* in the amount you enter in the COST box. The program (not you) will subtract the cost of land from the cost, to get the value of the structure for depreciation purposes.

-

[vinceation]

@Carl Wow, I so appreciate how thorough and quick-responding you are - thank you! If I can bug you just a bit more; I’m struggling to find the pages you’re describing where I get “describe this asset” and have the option to choose “rental real estate” - Perhaps because I’m using TurboTax Online? Or perhaps because I’m looking in the wrong place. I’m looking in the Rental & Royalty Income section, and below entering the income and expenses, I have the option to add assets. I have added “new rental”, which begins me in the questionnaire to determine depreciation (and which never prompts me with the questions/options you have written here).

thank you!

[Carl]

Perhaps because I’m using TurboTax Online?

Yep, that's why. I've never used online.

I have the option to add assets.

I would think that if you have the option to "add assets", instead of the option to edit an already entered asset, that would indicate to me that you haven't entered any assets. So if the property asset does not exist yet, you definitely need to enter it.

For me, on the rental property summary screen my selections are Rental Income, Rental Expenses, Assets/Depreciation, and Vehicle Expenses. The "Assets/Depreciation" section in the CD version  is where I'm going.

Upon selecting the Assets/Depreciation section, if there are not already assets there, then I get the screen to enter my first asset. Otherwise, if assets are already there, they're listed for me with an option to edit each listed asset individually, and a separate button to "Add Another Asset".

[vinceation]

Okay thanks for this help. I’ll see what I can figure out from Quick Books online help, maybe.

Really appreciate the help!

[Farabi]

@Carl your replies to this thread have been so informative, thank you for sharing your knowledge! 
I had a question about the scenario of adding a room down the line that you brought up in this post. I went through all the possible scenarios with my 3 bedroom home/rental in 2022.
1. First year rented

2. Rented out bedroom 1 in a 3 bedroom house from Jan-dec (full year) 

3. Rented out bedroom 2 from july-dec (6 months) 

4. I lived in bedroom 3 (master) for 11 months (jan-nov), then moved out and started renting the 3rd bedroom in Decmeber of 2022. So the whole property was rented by Dec 1,2022 to 3 separate tenants.

I noticed you mentioned that common areas can’t be used in calculating the % of rented space since it has to be exclusively used by the renter. My question is should/how would I restructure the % of rental space of each “asset” after moving out myself to incorporate common spaces shared by all 3 tenants? 

[DianeW777]

For 2022, due to the various time frames for each bedroom, you must determine the square feet for each bedroom. Then the expenses that pertain to each individual unit. Each will be different since the rental time frame various between bedrooms rented.  

• Example would be Bedroom 1 square feet divided by total square feed of the home x shared expenses such as electricity, internet, gas, etc
  • For Bedroom 2 & 3 after you determine the percentage of square feet divide that by 12 x number of months of rental use. Then use your result for the shared expenses 
  • Next enter expenses that directly relate to one bedroom or the other.

It should be handled separately for the months of use, in 2022.  My advice is to enter three rentals separately by arriving at the percentage of the cost of each asset (building and land) based on the percentage of use for each bedroom.  Manual calculations for 2022.

With the various time and space used, this would be the easiest to complete your tax return.  Next year you will be able to enter one rental activity and will need to remove the ones you have or 2022.

Next year, if you continue to rent all three bedrooms and you are still not living in this property, you would list one rental activity for all income and expense as one unit. Track your depreciation used in 2022 (and earlier if applicable) so that you have the correct prior depreciation for your property. This will be easily found in the depreciation worksheet(s) with your return.

@Carl will add any additional information he may have for you as well.

[Carl]

First, verify if you're using the online version of TTX or the CD/dowload version you installed on your computer.

I noticed you mentioned that common areas can’t be used in calculating the % of rented space since it has to be exclusively used by the renter. My question is should/how would I restructure the % of rental space of each “asset” after moving out myself to incorporate common spaces shared by all 3 tenants?

The property became 100% rental on the date the 3rd bedroom was "available for rent".

On that date, the remaining percentage of the house is converted to rental use. So for example, you may have bedroom 1 at 10% and bedroom 2 at 10% with each starting on a different date in 2022. Say, Jan for 1 and July for 2.

The remaining 80% was rented out in Nov. So you'll have 3 rentals entered on the SCH E, each with a different start/conversion date, and there percentage of use will add up to 100%.  the tricky part is, not all three were rented 100% of the time.You'll see three rentals listed on the SCH E, with one under each lettered column, A, B, and C.

Are you aware of the "problem" TTX has with this, as well as the solution to that problem? If so, I won't bore you with the details. Otherwise, understand it's important - or your first year depreciation "WILL" be dramatically wrong.

Assuming the property remains 100% classified as a rental in 2023, you'll deal with 2023 a bit differently. But don't bother with those details at this time, as you're looking at a year down the road. I can give you details if necessary or desired, "after" the 2022 stuff is all taken care of, so as to avoid the chance of confusion from information overload.

[Farabi]

Hi @Carl  and @DianeW777  thank you for your replies. 

I'd like to confirm my understanding.
You're both saying I would enter 3 separate rental entries (not 3 assets for 1 rental)?  
1. For Bedroom 1 rented/available from 1/1/22 - 12/31/22: First Year rented
2. For Bedroom 2 rented/available from 6/24/22 - 12/31/22: First Year rented, Converted to rental
3. For Bedroom 3 rented/available from 12/24/22 - 12/31/22: First Year rented, Converted to rental

So I'd be excluding "renting part of my home", because I will calculate/prorate all my expenses for each bedroom manually for 2022?

I think this is where the responses I got divert:
Question for @DianeW777: What I understand is that you're saying to calculate a "purchase price" for each bedroom (sq footage of the occupied room/total house sq footage) to use for the each rental (bedroom)? 

Questions for @Carl :
Similar to your post from last year, I followed:

- "Tell us about the property", I selected yes where it asks if the property was my residence in the past.

- "Enter purchase price", I entered the original purchase price when I bough it in 2021.
- For the available date, I entered the dates I put each room on the market as mentioned above.

- "Enter Fair Market Value", the appraisal district assessment determined that my FMV for 2022 was the same as the purchase price in 2021.

1. For each rental (bedroom), assuming I make the edit to the *problematic* question (from "Percentage of time I used this item for this business in 2022" to "percentage of floor space that is exclusive to the renter"), would I enter the same FULL property purchase price and FMV for each rental (bedroom)? 

2. Is there a difference between separating the 3 bedrooms into 3 rentals versus having 1 rental with 3 assets with a combined "percentage of floor space that is exclusive to the renter"=%100?

Thank you in advance!

[Carl]

For each bedroom, you will treat it "AS IF" it is the only bedroom being rented. You will have three physically separate rental properties entered and for each entry you will select "I rent a part of my home". I'm stopping any further comment here, so as to reduce the likelihood of confusion from information overload. Once you understand the above with absolute perfection of clarity, I'll be happy to answer any other questions.