Roommate - Schedule E

[purple_cow]

My spouse and I bought our first home in October 2020 and we have a tenant who rents out 2 of the 3 bedrooms and makes use of the common spaces (living room, kitchen, dining, family room). He signed a lease and pays $600 a month. Our mortgage is $1680.

We like living with him and it's been nice to offset some of our costs. But, I don't know how to report this income properly.

I am trying to complete Schedule E. I filled out all of the expenses, dividing out for the portion of the home he occupies and shares.

I also filled out the "new asset" information to determine the depreciation of the home, using tax-assessed land value and improvement values. But here is where I'm concerned. Am I supposed to fill out this depreciation as a portion of the home? I used the fully assessed values. 

Currently, my rental income is showing a loss. My understanding is that I'm not supposed to claim a loss in a roommate situation. But I don't know how to fix this.

Thanks so much for any help anyone can provide!

[Hal_Al · Accepted solution]

If this is merely a cost sharing arrangement where the amount paid is below fair market rental, there would be no reportable income to you. If the “rent” amount is fair market value, or more, there is still some question as to whether you even have to report it, as it almost always comes out zero. Most people take the attitude that it is not income; it's just room mates sharing expenses and ignore it. Family, as opposed to unrelated roommates, makes that position stronger.

Here’s what you may be required to do:

Report the income (enter at Rents & Royalties/Income & expenses from Rental Properties); and then deduct the expenses on schedule E. If the room mate has full run of the house, and there's just the 2 of you, then half your expenses are deductible (mortgage interest, property taxes, insurance, utilities, repairs, and depreciation [if needed}). Your net income will usually be less than zero.

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.

TurboTax (TT) does not handle this properly. TT will not limit your deductions to your income. You have to do that manually. TT wants you to enter this as a “not for profit rental”, which does not use Schedule E and puts your expenses on Schedule A (itemized deduction). I'm of the opinion that's not the proper way.