Renting Rooms / Portion of My House - Depreciation & Expenses

[GreatUncleSam]

Hi all,

I've been renting all 3 bedrooms  in my house that I also live in (my bedroom is the office with no closet) and struggling with several complicated questions. I've read through many posts on here and elsewhere, but still cannot find much in the line of definitive answers.

I purchased the house in 2021, and immediately rented rooms out to my friends. In 2022 they stayed part of they year then moved out. I wasn't able to find a good roommate until 2023. However, in order to get this roommate, I had to sacrifice renting one of the rooms because he didn't want a third roommate. So, I'm renting him 2 bedrooms.  There is a open area with a kitchen / living room.  I don't use the living room area at all and tell my roommates it's all theirs.

Question 1.

If the area / space I'm renting changes from year to year, (ie I decide to no longer rent out the 3rd bedroom, or decide not to rent and rooms at all), then each year the percentage time I enter under asset (actually space), would be different each year. How would that effect the capital gains recapture calculation when I sell the house?  Would I just look back and see how much I claimed each year I owned the house? Or is this variable rental area going to be a problem each year? I just want to understand now before creating a problem in the future.

Question 2.

If I eventually sell the house and it's still my primary residence (or has been for 2 of the last 5 years), am I still eligible for the full capital gains tax exemption?

Question 3.

I missed adding the asset and depreciating in last years TT filing and going to have to go add that back in as an amendment. I'm scared because this will result in less of a tax burden. Is there anything I should be aware of?

Question 4.

I see and have heard multiple opinions on this, and even when having TT reps call me. I see you can either use number of rooms rented or square footage. It doesn't say bedrooms, just rooms. The 2 rooms I'm renting now are small, and I'm offering the living room space. I'm not sure which way to go here.

Question 5.

I've seen multiple opinions on expenses outside of mortgage interest, insurance, and taxes. Once I determine the correct percentage to use, it seems some people are using a different percentage for certain expenses like utilities based on the number of people renting. However part of the year the house is not rented while I'm looking for a new roommate. How do I deal with this?

Question 6.

In TT 2022, where it shows the expenses for 2021 for reference, it's showing double the value if what my actual paper Schedule E for 2021 shows.  When I go to amend my 2021 Schedule E, it matches with the values in the paper schedule E.  Is this some sort of bug, or why would TT show double? In 2021 I forgot to put anything in for depreciation, and also entered that it was rented 365 days of the year, so it doesn't seem like anything here is affecting what's showing.

[GreatUncleSam]

Following up on Question 1:

It looks like from publication 523 where it states in 5a,

"Any depreciation you took or were allowed to take for use of your home for business or rental purposes"

as well as worksheet 3, step 2:

"List the total of all depreciation deductions that you took or could have taken for the use of your home for business or rental purposes between May 6, 1997, and the date of sale"

That there are no issues with varying depreciation amounts each year depending on how much space I was willing to rent, and how long.  I would need to track all depreciation deductions each year, then enter them here for tax reporting for the sale year.

[GeorgeM777]

Question 1 - If your rental space changes from year to year, then you will need to keep track of that percentage change in the rental space.  Your basis with regard to the space that was formerly rented, but currently is not, will adjust lower because of depreciation.  For example, if ten percent of the space is no longer being rented, then if you were to sell the home, that ten percent of the former rented space will have one basis, while the remaining 90% of the home will have another.  The more your rented space changes from year to year, the more complicated your calculations will become.  

Question 2 - Yes, provided the part of the home you live in was your primary residence for the period of time you listed in your post.  However, this only applies to the section of your home that was your personal residence.  The rental part is treated differently for tax purposes and is treated differently in TurboTax.  Here is a link to a TurboTax article that discusses how to report the sale of a rental property in TurboTax.

I sold my rental property.  How to report that sale.

Question 3 - No, if you need to amend a prior year tax return to add the missing depreciation, then go ahead and amend.   You want to have an accurate tax return.

Question 4 - You should use the square footage of the space you are renting.  Whether that square footage involves multiple rooms or just one room, it is best to use square footage as that number will be most accurate description of your rental property.  

Question 5 - It is not clear how landlords are basing utility usage based on the number of tenants.  Perhaps the rental unit does not have separate metering.  It is up to you how you want to allocate the utility usage; however, whatever method you use, it must be accurate for tax purposes.  In some cases, landlords may just charge a fixed amount for utilities.  Discussions of this type can be handled during the rental negotiations.   

While your rental unit(s) remains unoccupied for lack of tenant, if your intent remains to rent the unit, then for tax purposes the property is considered idle property.  You can, and should, continue to deduct the expenses associated with the idle unit, such as utilities, property taxes, depreciation, etc. 

Question 6 - It is not clear why that is happening.  Sometimes in the amendment process, tax entries will not update until all of the information has been entered.  Nonetheless, it appears you have a very good understanding of what needs to be done and why.  Thus, continue with your changes and should something appear amiss, you can post additional questions.

@GreatUncleSam 

[GreatUncleSam]

Thank you for the thorough reply. Following-up:

Question 1:

To keep things simple, it looks like I can just keep track of the amount I depreciated each year. If I sell the house, I would just enter the total amount I depreciated during the ownership of the property to make sure the IRS recaptures the depreciation. The IRS form only asks for the total amount you could / should have depreciated the property.

Question 2:

This post seems to suggest that you can still have 100% of the capital gains tax exclusion if you meet the criteria, but obviously still have to pay back the depreciation recapture. https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/can-i-still-be-exclud...

Question 3:

I tried doing an amended 2021 return through TT online (I have an OS where the download version isn’t supported). I ran into two bugs when trying to do an amended return which were confirmed by two representatives. Apparently there’s no way to get notified about the correction status, and I have no other way to do an amended return.

Bug 1: As soon as you enter anything other than 0 for the land value for your property, TT online lumps the entire cost of the property and land value into land value, and sets the property value to 0! This bug is confirmed by two reps.

Bug 2: There is no way to set a percent time the asset is in service. I owner the property 5 months of the year, but it forces depreciation for the entire year because of the missing option to set ownership days for asset. You can set ownership days for the expenses, but NOT the asset depreciation. This bug is confirmed by a CPA rep I spoke to this morning.

I’m wondering if there’s some way to track a status on these bugs so I know when I can do my amended return?

Question 4:

There is an open kitchen and living room, of which I don’t use the living room area and tell my tenants they can have that area. I don’t see why I couldn’t add in that square footage then, correct?

Question 5:

It seems like splitting utilities based on the number of tenants sharing the utilities makes more sense, and would give you a higher deduction generally than square footage, but the question would be, as you said, any period of times through the year that it is not rented. So, if I have 2 tenants along with myself, I could deduct 66.6% of each one of those bills for the time they are there. It seems like I would deduct nothing for the time that they aren’t if I choose this method?

Question 6: There turned out to be yet another confirmed bug this morning when I was talking to the CPA rep. Last night when I went through the error checking, TT warned me about a missing percent of area rented. I entered 50%. After I did that TT went and screwed up all my expense numbers for my property and I had to re-enter everything.

When I started my taxes, when asked if I wanted TT to divide the rental-related portion of the property, I had chosen “No, I’ll do the math and enter only the rental-related portion”. So, TT shouldn’t have gone and changed anything. The rep and I went back to the spot where my question was, and it was still set at “No, I’ll do the math and enter only the rental-related portion”. We changed it to Yes, and the 50% number that TT forced me to enter when doing the error checking, showed up here! So, it was applying the 50% to what I had entered even though I had selected “No”.

[AmyC]

Q1. Yes, keep track of total depreciation allowed or allowable each year.

Q2. Sale of main home meeting all qualifications allows the portion of the home that was your main home to be exempt with only depreciation being recaptured.

Q3. See if you can find a friend that will let you use the downloaded version. I wouldn't expect online revisions.

Q4. Only space specifically rented for private use counts. A bedroom is a private space, close the door, sleep. A living room is not rented by one person for private use.

Q5. The IRS will accept any reasonable allocation as long as you use it consistently and have sound logic along with the paperwork and math computations.

Q6. The downloaded version will allow you to see and correct things more easily. It is easy to switch to the download version once you locate a friend or family member with a computer.