Rent out a room with Depreciation related question

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.

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?

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.

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.

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.  ??

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 

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?

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.

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%? 

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.

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

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.

• 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.

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.

I found your reply answered many of my questions.  Thanks you so much!

Here's another twist on the whole "renting rooms in my home" tax problem. We rent out two rooms in a four bedroom house but we are only there six months or less out of the year.  When we are not there I presume we can take 100% of the utilities as an expense, since we aren't receiving any benefit from them. 

Is that correct?

Since our renters have the entire house (save our two bedrooms) for their exclusive use when we're gone, can we convert to a square footage allocation of other expenses (mortgage interest & taxes) for whatever those periods of time add up to over the year (probably close to half of the year)? If the law is moot on this I will presume it's okay.

I was surprised to learn insurance is not deductible as it is a mandatory cost of owning a mortgaged house.   It happens to be twice as expensive in the state where we have this house as in our permanent residence state.  I sure would like to be able to expense part of it!

Here are some things to consider when renting to a relative:

Make sure that you are renting at fair market value.  

It is important to charge fair market value to assure that you can claim all of your rental expense deductions.  If you rent below fair market value, then every day the relative rents the property is considered the same as a day when the taxpayer personally used the property.

Property cannot be considered rental property if the owner uses it personally for more than 14 days. So, if the taxpayer rents to a relative at below market value for longer than that, the house will be pushed out of the rental property classification, and the owner will lose all deductible expenses except mortgage interest and real estate taxes.

 

Be Prepared to Prove the Rent is Fair
 

You need to gather and keep proof that the rent is at fair market value. Some ways to do this are to

• Print or scan information about similar listings with similar rents
• Get fair rent letters from property managers
• Get an independent appraisal
   

The Relative Should Use the Property as Their Primary Residence
 

If the taxpayer wants the property to be considered rental property for tax purposes and they rent it to a relative for the year, that relative must use it as a primary residence. Otherwise, just as with renting at a below market price, every day the relative spends in the house will be considered a personal use day for the owner. So, if the relative just stays in the house for three months out of the year but has their principal residence elsewhere, that will kick the property right out of the rental property classification.

 

Be Cautious About Using a “Good Tenant” Discount

You may be able to give their relative a small price break by using what is known as a “good tenant discount”. Although 20 percent has been allowed in the past, that’s not a shoo-in. It’s safer and easier to defend a 10 percent discount.

5. Don’t Subsidize the Rent through “Gifts”
 

Once you set a fair market value for the rent to the related party, don’t then turn around and give them money gifts to help them pay the rent. The IRS may deduct the gift amounts from the fair market value rent price, and once again, a rental property classification could be quickly transformed to a personal residence classification.

For more on this topic see IRS Publication 5I27 - Residential Rental Property.
 

@ marcjy

I own a 4 bedroom home that I have converted to a guest house. I have 3 guest bedrooms and everything else (less of course my bedroom/bath) is shared/common area. How do I calculate the deductions for this? Details are below.

2nd floor contains:

3 guest bedrooms (used exclusively by guests)

1 full bath (used exclusively by guests)

1 storage room (used exclusively by me for guest room supplies (extra sheets, pillows, cots, floor mattresses, seasonal blankets, extra toilet and facial tissue, paper towels,.... )

1st floor contains:

* kitchen, livingroom, dining room, library, laundry, 1/2 bath (fully shared / common) 

* My bedroom and bath (used exclusively by me)

Backyard contains:

the hot tub, pool, deck, firepit, etc. (fully shared / common) 

Note: I definitely use over 350 square foot of my home for:

* a "home office"

* a large "storage room"  for guest room supply storage 

* part of the garage for guest room supply storage 

* part of the basement for guest room supply storage

You will need to do this based on percentage of use.  Get the total square footage of the house and subtract out all square footage that is personal use (the shared spaces are considered business use).  Use that percentage for figuring out the deductibility of anything related to the entire structure and for depreciation purposes.

@Reachn4dreams 

Hi I have a follow up question on this. 

How about the expense on the furniture I bought for the public area that the both renter and I share? And the purchase of the furniture happened during the lease time. Could I count a portion of the furniture towards my expense? 

I assume the purchase in the living room happened before the renter moved in cannot be counted.