Renting bedrooms tax question

[Farabi]

Ah okay, I understand now, thank you for the clarification @Carl .
What about "First year rented" though? Would I select that in addition to "I rent a part of my home" for each bedroom?

[Carl]

What about "First year rented" though? Would I select that in addition to "I rent a part of my home" for each bedroom?

Assuming the first year for each bedroom was 2022, then absolutely, yes. Remember, you're treating each room "AS IF" it's the only room rented. The fact that the third bedroom includes the rest of the house too, doesn't matter, based on the fact that since you moved out, one hundred percent of the property is rented out as of Dec. 2022.

[Farabi]

Thank you @Carl. I think I have it set up right now. I have another question if you don't mind answering.
To recap:

I lived in a 3 bedroom home in 2022 and was renting out part of my home. I put 3 different rental assets on Schedule E, one for each Bedroom (A, B, C).  I allotted proper percentages (sum for all 3 bedrooms = 100%)  in order to capture the correct depreciation and I manually did the prorated calculations for rental specific expenses (repairs, supplies, maintenance etc.)

1. Bedroom 1 was rented from January-December (full year) 

2. Bedroom 2 was rented from July-December (6 months) 

3. I lived in bedroom 3 (Master) from January-November(11 months), then moved out and started renting the 3rd bedroom in December of 2022. So, the whole property was rented by Dec 1, 2022 to 3 separate tenants.

My question:
I had a major shower leak in the master bedroom that I occupied at the time in February 2022. It leaked into the downstairs shared common areas with my tenant. The repair/improvement(?) was completed by May 2022. I spent a total of $6,500 on the shower repair which entailed demoing tile, installing a new shower pan, replacing rotted subfloor and joist portions and retiling. The breakdown was $2000 in materials, $1000 for a Plumber, $500 for a Carpenter, and $3000 for a Tiler.  Should I factor in the $6500 into the cost basis of the property specifically for my Schedule E entry for Bedroom 3 (master)? What about the other bedrooms?
Can I expense a portion of the cost of this repair/improvement(?) as part of the De Minimis safe harbor?

Thank you in advance.

[Vanessa A]

Should I factor in the $6500 into the cost basis of the property specifically for my Schedule E entry for Bedroom 3 (master)? Yes, the $6,500 would be factored into the cost basis of the property.  

What about the other bedrooms?  If you did not do any repairs to the other bedrooms, you would not have any additional expenses to include.

Can I expense a portion of the cost of this repair/improvement(?) as part of the De Minimis safe harbor? No, you cannot expense any part of the repair of your master bath that was used as personal property at the time of the repair.  The cost would just be added to the cost basis of your house/that room.

[Carl]

Should I factor in the $6500 into the cost basis of the property specifically for my Schedule E entry for Bedroom 3 (master)?

yes, you can add that to the cost basis for bedroom 3/rest of the house, and the in service date would be Dec of 2022.

You don't have to list it as a separate asset for bedroom 3. Since the work was done 10-11 months before it was placed in service, the rest of the house (with bedroom 3) and the improvements were placed "in service" as a rental all on the same date. So you can just add the cost to the bedroom 3/rest of house cost basis.

The cost basis for everything should add up to your total cost basis in the property, which includes the $6,500 for the master bath.

What about the other bedrooms?

What about them? You've accounted for your total cost basis in the property already. There's nothing left to add to the cost basis of anything.

Can I expense a portion of the cost of this repair/improvement(?) as part of the De Minimis safe harbor

No, because the cost of the improvement exceeds $2,500. Therefore, the safe harbor election is not an option.

Your real issue is going to be the 2023 taxes and getting the depreciation correct for 2023. That's asuming the property remains 100% rental for the entire tax year of 2023. It's going to require a lot of manual math on your part. But don't concern yourself with that right now. We can deal with that next year when you file your 2023 tax return. I would just suggest you bookmark this thread for reference, so you don't have to repeat everything when the time comes.

[Farabi]

Thank you @Carl for all your help! I am about done with this year's return.
Would you mind touching on how I'd go about getting the right Depreciation for 2023. The property will continue to be rented 100% in 2023 and after.

[HopeS]

Once you set up the assets to be depreciated it will automatically compute the 2023 depreciation once the return is rolled over into the software. You will see the 2023 depreciation expense on Form 4562 as well as on the Depreciation Detail report.

It is always a good idea to print your 2022 return and include all worksheets and save this to your computer.  Below are steps to print the 2022 return which you can do once you pay for the software:

1. Sign in to your TurboTax account
2. Open or continue your return
3. Select Tax Tools from the menu (if you don't see this, select the menu icon in the upper-left corner)
4. With the Tax Tools menu open, you can then:
   • Preview your entire return: Select Print Center and then Print, save or preview this year's return (you may be asked to register or pay first)
   • View only your 1040 form: Select Tools. Next, select View Tax Summary in the pop-up, then Preview my 1040 in the left menu

@Farabi 

[Carl]

Would you mind touching on how I'd go about getting the right Depreciation for 2023.

You really can't just "touch" on it.

With what is basically three separate rentals of a single structure, they're presently showing up in three separate columns on the SCH E. So long as you maintain three separate rentals year to year, there would be nothing to do or change with each passing  year. Otherwise, the math is beyond the capability of the program to perform, requiring manual intervention on your part.

As it stands right now, you have three separate rental contracts for a single structure. Just because one contract ends doesn't mean that portion is no longer classified as rental property. That is, unless you decide to not rent it out anymore.

The only place I've ever personally seen, witnessed or been exposed to the setup you have, is in a college town where a rental property owner is renting rooms to multiple college students. If two students leave after the semester and go home for the summer while one remains, it doesn't change the fact that the entire property remains classified as a rental, so long as the landlord is still actively trying to rent it and doesn't utilize any of the space for personal use during the summer vacancy.

Maybe you're focused on renting to college students for all I know, and plan to continue that into the foreseeable future.

[Farabi]

Oh I see, I am in fact renting to college students in a college town, actively renting year-round and plan to continue with the setup for at least a few more years.  

Thanks again for all your help @Carl !

[reyu123]

I was also having trouble finding the "percentage of time I used for this business" within the Turbo Tax Online version, however, finally found it! Posting to help anyone else in the amazing thread.

The online version forces you in the "new rental property" flow which limits your responses as mentioned above. If you delete/tap trash icon for the New rental property line, then add a new asset, you will see the options that will allow you to entry the percentage of time used for this business.

[Carl]

New rental property line, then add a new asset, you will see the options that will allow you to entry the percentage of time used for this business.

Unless it's been fixed, (and I doubt it has since it's been wrong for several years now) that "percentage of time" question in the assets/depreciation section should be asking you for "percentage of floor space".  If you enter percentage of time there, you can expect the depreciation to be wrong.

To confirm see IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf and use the MACRS worksheet on page 36. For line 6 of the worksheet, table A-6 on page 71 applies. I'd be interested to know if the program figures it correctly for the 2022 taxes.

[Farabi]

Hi Carl, 
A year later and I am back to this thread, hoping I could ask for your input on my 2023 return. 

For 2022, I had 3 bedrooms in a home rented separately,  I lived there for part of the year.
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

For 2023,  all 3 rooms were rentals, still rented separately. I put the property as one entity in Turbo for 2023 and added the income and expenses for all 3 rooms. I wanted to ask if I should be concerned about Turbo's

automatic depreciation calculation for 2023 or if that stands correct considering the setup in 2022. 
Thank you in advance.

[Carl]

Unfortunately, you can't combine all three rooms into a single property entry. If you do, then you will totally skew the depreciation; history, current and future depreciation will be all wrong.