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808kolohe
New Member

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

I own and live in a 2 bedroom condo and started renting out the 2nd bedroom in September. Earlier in 2016 I remodeled most of the unit (big ticket/tangible items: flooring, kitchen cabinets/counters/appliances, bathroom cabinets/vanity, fixtures). I would have remodeled the unit anyway regardless if I ever rented out the other bedroom. But since I do rent out the other bedroom, can I legally claim any of these remodeling expenses as deductions/depreciation, or is it best to leave the remodel out of the picture? It certainly seems complicated when I go through TT and attempt to insert these expenses, even after calculating the days rented and the percentage of home that is rented. Thanks.

1 Best answer

Accepted Solutions
Carl
Level 15

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

You're in a descent situation then. I spent 8 years in HI and loved it. But if I wasn't in the military at the time, there's no way I could have afforded it.

Basically, it's important that you use the program the way it's designed and intended to be used. That's because you'll deal with the rental stuff first, and the program will automatically split your rental costs between SCH E, and your other deductible homeowner deductions on SCH A.

So you'll work this through the Rental & Royalty Income (SCH E) section under the Personal Income tab in the Business Items section. (I'm using desktop too, so I'm with ya on this.)

Pay attention to detail, because you will select the option for "I rent out a part of my home". Then when asked, elect to have the program "do the splits" for you. Even with that selection, there are some things the program just can't split. For example, your property insurance. That is deductible for rental property, but is not deductible for your primary residence. So you'll have to manually figure the amount you will enter for property insurance. Whereas the mortgage interest reported on the 1098-Mortgage Interest Statement, will be done for you. When the program asks, you enter what's on the 1098 and the program takes care of it.

One of the things you need to understand in figuring your rental portion of your property, that is only the portion that is "exclusive to the renter". So for example, if you have a 2BR/2BA house with a bathroom off your bedroom and the other bathroom across the hall from your renter, that 2nd bath is NOT exclusive to the renter. So you can't count it as the rental portion. But if that bath is accessible only from the rented bedroom, then you can include it in the exclusive rental portion when you're figuring out the square footage for that.

When working through the rental expenses section, be careful. Some screens ask you for "rental portion only" expenses, while other screens will ask for "whole house" expenses. While not impossible, it is a bit rare to have any number higher than ZERO in the rental portion only expenses. So watch out for that.

Also, for your property improvements, they will "help" a bit on the required depreciation you have to take. But understand that in no way are they 100% business use. For those property improvements, their "percentage of business use" will be the same as the percentage of square footage of floor space that is exclusive to the renter.

The below is a "boilerplate" I put together for rental property owners. It does apply to you too. But understand it's geared towards someone who as a rental property that is 100% business use. So take that into account.

 - Conversion date: This is the date one day after you moved out of the property. (In your case, the day after you decided to rent this room and got all your personal stuff out of it.)
 - In Service date: The first day a renter "could" have moved in. Generally this is the day you put the FOR RENT sign in the front yard.
 - Days Rented: The day count starts on the first day a renter "could" have moved in. It doesn't matter how long it was empty before a renter actually moved in. Vacant periods between renters also counts as days rented, provided you did not live in it (Or use the space for personal use in your case) for one single day of the vacant period.
 - Days of Personal Use: This is the number of days you lived in the property (or used the rental space for personal use) AFTER (I repeat - AFTER) you converted it to rental (See Conversion date above). it is extremely rare for this number to be anything greater than ZERO.
 - Percentage of business use:  100%. I'll repeat - One Hundred Percent. It's based on what you used it for after the conversion date. But do note that the business use percentage shown on the property as a whole in the Assets/Deprecation section will NOT be 100%. It's not supposed to be. So don't go changing it.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property. In your case, property improvements will NOT be 100% business use. They can't. The percentage of business use will need to match whatever the percentage of floor space is claimed as exclusive rental.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not classified as cleaning/maintenance costs. They are instead classified as startup costs, amortized as such and depreciated over time.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are classified as startup costs, amortized as such and depreciated over time.

Startup Costs

Please note that if residential rental income is not your PRIMARY business, and your PRIMARY source of income, then your rental business is considered to be passive, and you flat out, no way, no how , are not allowed to deduct your startup costs. Period. The IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property produces “passive” income, while other types of businesses produce “active” income. Your rental property is not classified as your “active” business, unless you are a real estate professional, an active participant in the management of the property, and it provides a substantial (more than half) amount of your taxable income for the year. All three requirements must be met. There are no exceptions

Start up costs are expenses incurred while preparing the property for rent, with the express purpose being to prepare it for rent, before it is available for rent. These costs do include repair, cleaning and non-recurring maintenance cost. It does NOT include property improvements. With a normal business that produces active income (rental income is passive) you would amortize these costs over 15 years. But you can’t do that with a rental property. However, you can deduct a maximum of $5000 in startup costs in the first year the rental is available for rent, PROVIDED your total startup costs do not exeed $50,000. This is reported on line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

If you have more questions or concerns as you work this through, please by all means, post back. There's a good chance I forgot something, and that there's a question or two you've not thought of yet.

View solution in original post

9 Replies
808kolohe
New Member

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

Mahalo for your quick response, Carl! I rent the room to a grad student that attends university and I charge a rent amount that is competitive and on-par with other room shares in Honolulu. I would certainly consider her a tenant since I have no relationship with her prior to the room rental agreement. However, since we are similar in age/personality, I would also consider her a friend now too (but not in a way that I'm helping her out, she pays the same rent she would pay at another room share). Truth be told, my monthly housing expenses are $2000 when all bills are paid, and the fair market rent I charge is $610/mo, all inclusive.
Carl
Level 15

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

You're in a descent situation then. I spent 8 years in HI and loved it. But if I wasn't in the military at the time, there's no way I could have afforded it.

Basically, it's important that you use the program the way it's designed and intended to be used. That's because you'll deal with the rental stuff first, and the program will automatically split your rental costs between SCH E, and your other deductible homeowner deductions on SCH A.

So you'll work this through the Rental & Royalty Income (SCH E) section under the Personal Income tab in the Business Items section. (I'm using desktop too, so I'm with ya on this.)

Pay attention to detail, because you will select the option for "I rent out a part of my home". Then when asked, elect to have the program "do the splits" for you. Even with that selection, there are some things the program just can't split. For example, your property insurance. That is deductible for rental property, but is not deductible for your primary residence. So you'll have to manually figure the amount you will enter for property insurance. Whereas the mortgage interest reported on the 1098-Mortgage Interest Statement, will be done for you. When the program asks, you enter what's on the 1098 and the program takes care of it.

One of the things you need to understand in figuring your rental portion of your property, that is only the portion that is "exclusive to the renter". So for example, if you have a 2BR/2BA house with a bathroom off your bedroom and the other bathroom across the hall from your renter, that 2nd bath is NOT exclusive to the renter. So you can't count it as the rental portion. But if that bath is accessible only from the rented bedroom, then you can include it in the exclusive rental portion when you're figuring out the square footage for that.

When working through the rental expenses section, be careful. Some screens ask you for "rental portion only" expenses, while other screens will ask for "whole house" expenses. While not impossible, it is a bit rare to have any number higher than ZERO in the rental portion only expenses. So watch out for that.

Also, for your property improvements, they will "help" a bit on the required depreciation you have to take. But understand that in no way are they 100% business use. For those property improvements, their "percentage of business use" will be the same as the percentage of square footage of floor space that is exclusive to the renter.

The below is a "boilerplate" I put together for rental property owners. It does apply to you too. But understand it's geared towards someone who as a rental property that is 100% business use. So take that into account.

 - Conversion date: This is the date one day after you moved out of the property. (In your case, the day after you decided to rent this room and got all your personal stuff out of it.)
 - In Service date: The first day a renter "could" have moved in. Generally this is the day you put the FOR RENT sign in the front yard.
 - Days Rented: The day count starts on the first day a renter "could" have moved in. It doesn't matter how long it was empty before a renter actually moved in. Vacant periods between renters also counts as days rented, provided you did not live in it (Or use the space for personal use in your case) for one single day of the vacant period.
 - Days of Personal Use: This is the number of days you lived in the property (or used the rental space for personal use) AFTER (I repeat - AFTER) you converted it to rental (See Conversion date above). it is extremely rare for this number to be anything greater than ZERO.
 - Percentage of business use:  100%. I'll repeat - One Hundred Percent. It's based on what you used it for after the conversion date. But do note that the business use percentage shown on the property as a whole in the Assets/Deprecation section will NOT be 100%. It's not supposed to be. So don't go changing it.

RENTAL POPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property. In your case, property improvements will NOT be 100% business use. They can't. The percentage of business use will need to match whatever the percentage of floor space is claimed as exclusive rental.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not classified as cleaning/maintenance costs. They are instead classified as startup costs, amortized as such and depreciated over time.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are classified as startup costs, amortized as such and depreciated over time.

Startup Costs

Please note that if residential rental income is not your PRIMARY business, and your PRIMARY source of income, then your rental business is considered to be passive, and you flat out, no way, no how , are not allowed to deduct your startup costs. Period. The IRS says so. See https://www.irs.gov/pub/irs-drop/rr-99-23.pdf and please take note that rental property produces “passive” income, while other types of businesses produce “active” income. Your rental property is not classified as your “active” business, unless you are a real estate professional, an active participant in the management of the property, and it provides a substantial (more than half) amount of your taxable income for the year. All three requirements must be met. There are no exceptions

Start up costs are expenses incurred while preparing the property for rent, with the express purpose being to prepare it for rent, before it is available for rent. These costs do include repair, cleaning and non-recurring maintenance cost. It does NOT include property improvements. With a normal business that produces active income (rental income is passive) you would amortize these costs over 15 years. But you can’t do that with a rental property. However, you can deduct a maximum of $5000 in startup costs in the first year the rental is available for rent, PROVIDED your total startup costs do not exeed $50,000. This is reported on line 18, “Other Expenses” of SCH E, and should be labeled “start up expenses”.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.

If you have more questions or concerns as you work this through, please by all means, post back. There's a good chance I forgot something, and that there's a question or two you've not thought of yet.

View solution in original post

808kolohe
New Member

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

Wow, what a beautiful answer. I certainly appreciate your custom/tailored responses to my individual situation! One snafu you identified that did not agree with my draft tax return is the Rental Use Percentage calculation. You refer to only using the square footage that is 'exclusive' to the renter. In my case, since I have a 2 bedroom 1 (shared) bath, the only truly exclusive space belonging to my roommate is her bedroom. However, another SuperUser has indicated, with some subsequent disagreeing feedback from community, that the common square footage (ie total space, minus my exclusive bedroom, minus her exclusive bedroom) can also be claimed in the rental percentage calculation. The question/answer to this calculation method is below. I had been following that guidance, so when I look at the total apartment size (750 sq ft), subtract my exclusive space (150 sq ft), and subtract her exclusive space (125 sq ft) we have 475 of shared space. By that other SuperUser's remark, I should be able split the 475 sq ft shared space by 2 (= 237.5) and my rental use area would be 237.5 + 125 (362.5), and when divided by  the total area of 750 sq ft I get a percentage of 48.33%. Using the 'exclusive' space of 125sq ft alone results in a % of 16.66%.  

In any event, the change in refund is only about $400, and either way TT says my audit risk is as low as it gets. But, it sure would be a nightmare to be randomly or selectively audited and then find out I had used the wrong method!


<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/2689025-how-do-i-calculate-percentage-of-rental-use-for-a-2-bedroo...>
Carl
Level 15

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

I'm still reading through the referenced IRS pub in that post, but so far what I'm seeing indicates the smaller. Still reading though. So far, what I"ve read only deals with splitting expenses, and haven't gotten to the depreciation part yet.
Carl
Level 15

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

Well I've read it through, and I'm not seeing anything in the document to support @Djay43 's math. I've flagged him on this post because I'm thinking we missed something maybe?
808kolohe
New Member

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

Thanks again @Carl !!!! Looking forward to an audit-safe tax return thanks to your wikiwiki support!
Carl
Level 15

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

The remodeling adds to your cost basis, and while it will matter for depreciation purposes on the rental portion, it will make it's biggest impact in the future, when/should you ever sell the property.

But first, are you actually renting to someone whom you would refer to as a tenant? Or would this be more aptly described is you helping out a friend where in reality, you're just "sharing expenses" ? If the later, reporting the income as rental will not really benefit you that much - especially if you're not charging within the range the fair market rental values in your area.

nbadhe2020
Level 2

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

Hi - When I added details such as rents and expenses for one room form my 5Bed room house, it calculated depreciation of $9K and my rent for whole year from that one room was $6K. How can I take that much depreciation in a year 🙂 I think there is bug in turbo tax software?? maybe??

Carl
Level 15

Renting out a bedroom, living in the other. Can I deduct/depreciate any of my household remodeling expenses while it is also my full-time residence?

@nbadhe2020 you have posted to a thread that is over a year old, and applies to the 2018 tax filing season. You'd be better off starting your own new thread.

Depending on the value of the structure and the percentage of your floor space that is being rented, that may be correct. But I would need more details to work with here, before I can be of any real assistance. How about provide those details in a new thread please?

What is the cost basis of the structure? What percentage of your floor space is classified as rental?

Take note that is is quite common for rental property to operate at a loss every year. When you add up the allowed rental deductions of mortgage interest, insurance, property taxes and add that to the allowed depreciation, changes are those deductions will exceed the rental income, hands down.

Now things can be different when renting out a part of your primary residence. So that's why you need to provide the numeric data.

 

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