Rent out a room with Depreciation related question

[Igotquestions]

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!

[MaryM428]

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

[Reachn4dreams]

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

[RobertB4444]

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 

[konka777]

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.