Room rental in personal residence depreciation

[LuLuna]

I purchased my home in 2011 and in 2023 I rented out a room part time. 
I have previously rented the entire home.

For depreciation, when I enter the room rental as an asset, TT asks for date acquired, 2011, and date placed in service 2023. For all the different improvements done, do I need to enter each one separately with it's own date, or can it be lumped all together with the same date put in service?

Should I subtract prior depreciation from the cost in this first entry of the "room rental?"
Do I reduce the entry by the percentage of the home rented?
I see where I can enter the business use percentage in TT and the software will do that calculation for me.
thanks for any help!

[MinhT1]

As this is the first time you rented out one of your rooms, the date placed in service is the date you started renting out.

You can add all the improvements you made since you bought the home to the purchase price to have the cost basis of your home (excluding land).

As you are only renting one room, you have to calculate the rental percentage (for example by dividing the rented area by the total area of your home). Then multiply the cost basis of your home by the rental percentage to arrive at the cost basis of the rented area, which is used for depreciation.

Also read this IRS publication, paragraph on Renting Part of Property on page 25.

[Carl]

There is a problem when renting out "a part of" your home. Chances are high the depreciation figured for that first year will be wrong. When (not if) that happens let me know and I'll show you how to fix it so that you can still e-file.
To confirm the correct depreciation amount for the first year, use the MACRS worksheet on page 36 of IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf  For line 6 of the worksheet, use Table A-6 on page 71.

[LuLuna]

"As you are only renting one room, you have to calculate the rental percentage (for example by dividing the rented area by the total area of your home). Then multiply the cost basis of your home by the rental percentage to arrive at the cost basis of the rented area, which is used for depreciation."

Let me make sure I understand the first part though. You are saying to add together all the improvements to the purchase price (minus land) as one asset entry with the same date of purchase, and then the date placed in service?

I understand the two calculations, just not how to enter it properly in Turbo Tax (desktop version)
I have 20% of home used for business (square footage percentage) and about 120 rental days of 180 available (40%)

I entered that I don't rent 100% of the time, and I've entered personal use days versus rental days.

For the asset entry, I used the the 20% entry for time used as I've seen that suggested here. My depreciation report is showing that it is using the 20% for the cost basis, but is ignoring the percentage of use for depreciation. Should I be entering the info differently?
I will have the same rental percentage next year, but the percentage of time will vary each year, so I want to enter it right the first time.

thanks!

[Carl]

You are saying to add together all the improvements to the purchase price (minus land) as one asset entry with the same date of purchase, and then the date placed in service?

Date of purchase "does not matter" for property improvements done "before" you placed the property in service. Depreciation starts on the date placed in service. Not the date of purchase. So all property improvements done "before" you placed the property in service can be added to the original cost basis and entered as a single asset. Example:

Purchased property in 2010 for $100,000.   $80,000 is allocated to the structure and $20,000 to the land.

With just that, (and only that) you would enter:
COST: 100,000

COST OF LAND 20,000
The program (NOT YOU) does the math and assigns $80,000 to the value of the structure.

Now lets say in 2015 you added on a room to your house at a cost of $20,000. On the 2023 tax return you would enter:

COST 120,000

COST OF LAND 20,000

Note that what you paid for the land does not change. Only the value of the structure on that land changes. So the program (not you) would do the math and assign $100,000 to the value of the structure.

If you're renting only 20% of your home, then 20% of $100,000 ($20K) would be assigned to the rental portion and depreciated over 27.5 years. Then 20% of the land value ($8,000) would be assigned to the land, and land is *not* depreciated.

[LuLuna]

If you're renting only 20% of your home, then 20% of $100,000 ($20K) would be assigned to the rental portion and depreciated over 27.5 years. 

Thanks for the info @Carl 
When I enter the asset, do I enter the full amount, or just the precalculated 20% ?
Right now I have the full amount, and entered 20% business use as was suggested in many threads here (They say to enter percentage of space if only renting a part of your home). But then it isn't able to calculate the percentage of use.
Is it better enter the cost reduced by 20% of space, and then enter the business % use as rental days/personal days? (Does days need to total 365, or are vacant days just ignored? Are "available for rent" days ignored?)

I just got off the phone with TT support and they told me I can't take depreciation if I only rented the room for 2 months out of the year...I've never heard that before.
I rent the room sometimes, it sits vacant at times, and I use it for me or my friends at times. I was calculating about 60 days rented from Jan-Dec.

thanks for any help

[LuLuna]

"Then 20% of the land value ($8,000) would be assigned to the land, and land is *not* depreciated" 

When entering the value of the land, should i enter it at the reduced 20% of home square footage? 

The business use percent would be then entered based on rental day percentage, which would only affect the asset entry minus land value?

I have some prior depreciation from years ago when I rented the entire house, I assume I subtract that from the cost basis before the 20% calculation.? 

thanks for your help

[DianeW777]

First, do not enter any land when you are only doing a room rental.  Second, if you are not renting for a profit, then there are rules for 'Not for Profit' rentals, which is what they were trying to explain at TurboTax Support.

Not for Profit Rental:

If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Where to report. Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8j. If you itemize your deductions, include your mortgage interest (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A. Presumption of profit. If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

If you never depreciated the property due to the intent of not for profit during any and all rents, then there is nothing to recapture when you sell your home.

• IRS Publication 527

If you decide you are renting the property for a profit: Time used and actions taken for rental purposes would be factors of consideration.

You indicated the space is not used full time for rental activity, but is used by your friends and yourself when you don't rent it.  This makes the calculations difficult for the software.

Calculations you should do on your own:

To enter the business use percentage of the cost, for the asset (building only) which is calculated by square feet of the room divided by the total square feet of the home, then multiplied by the following factor:  days rented divided by total days available for rent during the year.  This is the same percent you would use for any expenses that are indirect meaning they would be for the entire home such as utilities, insurance, property taxes, mortgage insurance.  Any expenses specifically for the room and not used for personal purposes would be deductible at 100%.

@LuLuna 

[LuLuna]

Thanks  for your response @DianeW777 
The room does make a profit when doing the calculations since my expenses are low and I'm in a high rent area.

For depreciation, do not enter any land value.

For the building, I used to rent out the entire home, but not for the last 2 years, so I have prior depreciation. Should I minus the prior depreciation from the total cost when the room is "placed in service," or should I enter it under prior depreciation on form 4562? I'm assuming it's cleaner to just track the prior depreciation of the whole house on my own spreadsheet, and keep this new "room rental" as a separate entity?

For the building, I enter the original purchase price, minus land, plus improvements, (minus any prior depreciation taken?) and then divide by square footage percent of home (and divide by business use days percentage? )

TT has a place to enter business use percentage for assets that does the calculations for me. so I'm thinking I'll enter the calculated cost reduced by % of the home, and then let TT divide it by the business use % (rental days calculation) since that is an amount that will change every year.

Ugh, this is a complicated calculation! Thanks for any help and ability to track all this!

[DianeW777]

Yes, you can enter the correct prior depreciation when asked for that amount. If it's easier on the spreadsheet you can choose that method and keep the information with your tax file until the house is sold.

Do not subtract prior depreciation when entering the room rental portion of the building cost.  The depreciation is being tracked automatically and is not used to adjust the cost basis for the room rental.

It's a good idea to let TurboTax do the calculations using rental days which is the correct business use percentage. This does keep all details in the tax return for future.

@LuLuna 

[LuLuna]

Yes, you can enter the correct prior depreciation when asked for that amount. If it's easier on the spreadsheet you can choose that method and keep the information with your tax file until the house is sold.

TT doesn't ask for prior depreciation so it seems I just need to adjust it myself? I tried 3 tests with slightly different answers and it doesn't ask. Not sure what I'm missing?

Do not subtract prior depreciation when entering the room rental portion of the building cost.  The depreciation is being tracked automatically and is not used to adjust the cost basis for the room rental.

I don' t understand what you mean. I thought to arrive at the cost basis of the room, I would need to reduce the original cost of the home (minus land) and any improvements, and then divide that number by the % of the home used. If I don't subtract prior depreciation, I would have to use the entire original costs?

It's a good idea to let TurboTax do the calculations using rental days which is the correct business use percentage. This does keep all details in the tax return for future.
Yes, I want to let TT do this calculation, but it seems unable to do both calculations (% of home and % of days) so I'm thinking I need to pre-calculate/reduce the adjusted cost by % of home, and let TT do % of time. Does that sound right?

[DianeW777]

First, TurboTax will ask for prior depreciation when you enter each asset if the date placed in service is prior to 2023.  Inside of any asset is the only place you will see this when completing your tax return.

Depreciation is calculated each year using the original basis and the original basis is never adjusted for depreciation or anything else. This answer refers to the business percentage of the cost basis.

I suggested you do the calculations manually because you know exactly what you need to enter for the home and the expenses.  You should definitely calculate the portion of the home, then you can let TurboTax do the calculations by days of use percentage for all other expenses.

@LuLuna 

[LuLuna]

• First, TurboTax will ask for prior depreciation when you enter each asset if the date placed in service is prior to 2023.  
• That makes sense. I entered 2023 because it asked if this was the first time I used it for "this business" and I thought of the room rental as a new business. If I enter the date that the whole house was first rented, it thinks I have many more years of depreciation taken than i do because it wasn't "in service" every year. 
• Since the date "acquired" I have done several home improvements and land improvements. Some are on the whole house, some on the room only, and some to areas of the house the roommate doesn't use. Would I need to enter each improvement and date separately or can I enter all costs as one asset?
• Is it ok to enter 2023 as the first time in service, no prior depreciation and just keep my own spreadsheet to track what was taken?
  You said not to enter land value at all, so should i not include land improvements as well? TT does say to include land value of residential real estate, and then subtract it.

Thank you so much for your help!!!!

[DianeW777]

Yes, it is ok to enter 2023 as the first time in service, no prior depreciation and just keep my own spreadsheet to track what was taken.

Yes, add all the costs to the entire house together, then separately enter the improvements that were for the office only.  You can add the land in the space provided because TurboTax will subtract it before calculating depreciation. I was speaking as if there was only the home office cost basis entry.

@LuLuna 

[LuLuna]

• Thank you.

Should I enter land value at percentage of home?

Should I enter land improvements? In 2023 it was new driveway, patio, and drainage... not really used by the room. 

House Asset: Add original cost of home plus entire home improvements together and divide by percentage of home. 

Add any improvements to room only and keep at 100%.

I think it will be much easier to track prior depreciation separate. 

Thanks for your excellent... So much appreciation!