Tax Year Prior to 2020: Do I have to claim income from renting a room in my primary residence if I'm not making any money comparative to costs?

[DJS]

Yes, you have to report this income.

If you collect rent from someone who lives in a property that you own – even if it's just a room in your house – you're considered a landlord and must report the rent you receive as taxable income.

The rent is considered income in the year you received it, even if the rent covers a time period in a different year. In other words, your tenants' rent payment for January of 2014 collected in December of 2013 gets reported on your 2013 return, but a 2013 rent payment that wasn't received until 2014 is reported on your 2014 return.

To offset your rental income, the IRS lets you deduct expenses and depreciation related to the rental. We'll show you how to enter both your rental income and expenses below.

Entering rental income and expenses

1. Are security deposits taxable?
   

[Hal_Al]

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); then deduct the expenses. TurboTax will do this 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.

It is possible for you to gain a positive tax effect from this activity; If enough of your schedule A deductions (mortgage interest &  property tax) are shifted to Schedule E, and your standard deduction becomes bigger than your itemized deductions, you will have effectively saved on taxes.

If you have no mortgage, then there could well be profit involved, which you may have to offset with depreciation that could lead to "recapture" in the future when the property is sold.

[mradamski80]

We rent a bedroom in our house. Why does it seem Turbotax has us entering in our mortgage details a second time? I don't see anywhere where it says to split up things like the mortgage interest, property taxes, etc. This seems like it would create inaccuracies in our section for the actual mortgage deduction. But claiming it twice doesn't seem right either as it's the same house, not a separate unit. 

Turbotax also seems to have difficulty understanding that although we rented the bedroom 208 days, we also lived in the house far more than 162 days (turbotax wants it to add up to 365 days). Seems Turbotax thinks this bedroom is an entire unit in our house when it's not. 

[Carl]

For your specific and explicit situation, it is IMPORTANT that you work through the program the way it is designed and intended to be used. If you do not, changes are high your taxes will be wrong and it will be "YOUR FAULT" which is not covered under the TTX 100% Accuracy Guarantee.

WHen used the way it's designed and intended to be used, you can elect to have the program "do the splits" for you for those deductions that go on the SCH E for the portion rented, and those that go on the SCH A for the portion that is not rented. But pay attention to detail.

Some screens ask you for "whole house" expenses, while others will ask you for those expenses that are 100% related to the rental portion only. Generally, all of your rental portion only expenses will be zero, and your "whole house" expenses will be more than $0.

Then, based on the data you enter the program will do the splits "for you" based on the percentage of floor space you rented out, and the number of months it was a rental.

Here's some additional information you *WILL* need for clarification so that you don't make a "your fault" mistake.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out. If renting a room in your home, it's the day "AFTER" you stopped using the space for personal use.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house or use the room/space for personal use  for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. If renting a room in your home then it's the number of days you used that room for personal use AFTER you converted that room to a rental. I seriously doubt (though it is possible) that you lived in the house (or used the space if renting a part of your home) as your primary residence, 2nd home, or for personal use after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

Now afer you work through all of the above, I would like you to help me identify a programming error with the program that only applies to *YOUR* specific situation. If you are successful in identifying the error (thus proving their is "in fact" a programming error) then I will help you to "fix" it so that your taxes are correct on this matter and won't delay any refund you may have coming.

Basically, go to IRS Publication 946 - How To Depreciate Property at https://www.irs.gov/pub/irs-pdf/p946.pdf

Then on page 36 of that document use the MACRS worksheet in the right column to manually figure your first year allowed deprecation. Get the percentage rate you need from table A-6 on page 70 of that document. If 2019 was your first year in service, then your percentage rate is in the first row, under the column for the month you placed it in service.

What you figure manually "should" be within $2 of what the program figures. But I'm expecting it to be off by quite a bit more, depending on the month you placed it in service in 2019. So if it's off let me know and I'll tell you what one date entry you made int he program, you need to change so that the program will agree with what you figured manually, within $2.

[mradamski80]

What about the spot for the real estate taxes? Is that then a $0 entry, or should it be based on the % of the house (sq ft etc) rented?

Also, on the interest paid screen, this is one that seems like, as you mentioned, that the software seems to be doing the auto-calculations for me. Therefore, it seems I enter the same amount from my mortgage document?

[ColeenD3]

You need to prorate between person and rental portions. There is a way to ask the program to make the calculations for you. If you do, it will divide both the mortgage and the property taxes. You also have the option to do it yourself, manually.

[mradamski80]

I do not see that option anywhere, nor do I see anywhere other than the Mortgage Interest screen where it says it'll auto calculate anything. It seems TurboTax assumes the rental property we have is a separate property when in fact it's a bedroom in our house.

Here is precisely what I am seeing:

Deductions & Credits

In this section, I see 2 sections which apply to our mortgage 1098 form: Mortgage Interest/Refinancing and Property (Real Estate) Taxes. I enter in the amounts exactly as they appear in our 1098 form, in full. There is no mention of potentially having to divide this up based on any set of unique circumstances, which I wouldn't really expect to see in this section anyway.

Next, I head back to Wages & Income. I work through Rental Properties and Royalties (Sch E).

*I indicate I am not a real estate professional.

*I enter in the rental income section which makes perfect sense. No issues there.

*In the expenses section is where the confusion comes in. I choose to walk through everything.

*I then have the option to enter in my amounts for advertising, supplies, utilities, maintenance expenses,  repair expenses, management expenses, legal expenses, commission expenses, travel expenses, and insurance premiums. I don't understand the difference between "knowing my total expense" vs "having a list" when it just asks me to put in the amount anyway if I choose list. Second, none of these screens indicate whether I should be pro-rating anything or whether it's done automatically. That's my exact issue.

It continues to be the same problem once I get to the next sections: Report real estate taxes. The exact quote in this section says, "Enter the real estate taxes paid on your rental property." Ok, so does that mean pro-rated or the full amount? When I click on learn more, it tells me, "If your property taxes are included in your monthly mortgage payment, find your total real estate taxes paid on the mortgage interest statement your lender sent you." Ok, so is that the full amount again? It does not indicate.

When I get to the area where it's asking me to report the mortgage interest, I do see a line finally that says "TurboTax will allocate your personal portion of qualified interest over to to the deduction section for you."  Ok, that's great! But is that just for the interest on this one screen only?

There is nothing whatsoever about using percentages based on square footage, or anything like that anywhere that I am seeing.

Thank you for the continued guidance.

[AnnetteB6]

Go back through your rental income and expenses section and double-check your entries in the Property Profile section.  On the page in that section that is titled, "Do any of these situations apply to this property?" be sure that you have checked the box beside I rent out part of my home.

Then, as you go through the next few screens, you will have the opportunity to state what percent of the home was rented.  This percent is based on square feet or another method you choose.  It will be used to prorate your expenses.

@mradamski80

[mradamski80]

Thank you. Unfortunately, that was already checked.

[LindaB1993]

The TurboTax Program is designed to prorate the mortgage interest and property taxes under the Rental Income and Expense Section.

If you have also entered the mortgage interest statement under ("deductions and credits">Home), please delete the duplication. 

[mradamski80]

Do I delete it from the Home Deductions section or the Rental Property Income section?

Also, I do not see in either place where it's taking a % based on square footage or anything like that.

Thank you!

[VictorW9]

You will have to do the apportionment yourself based on the square footage calculation. You can do this by reducing the portion applicable to the rental from the main house that you live. This will reduce the mortgage interest deductible on schedule A and the room portion transferred to Schedule E. You will do the same for property taxes too. The other expenses for schedule E will be directly related to the rental.

[mradamski80]

So just to use easy and round numbers as an example:

If I paid $10,000 in taxes and $20,000 in property interest, and the square footage of total house usage (bedroom, bathroom, shared kitchen and family room) is 40%, I'd enter the following:

Schedule A taxes: $6,000

Schedule A interest $12,000

Schedule E taxes: $4,000

Schedule E interest: $8,000

Thanks for confirming! My last question is how do I manually get back to the Schedule E? When I did the auto-review, I finally saw a spot where I could enter in % of the house being used, but I need to change this percentage now, but only saw it pop up during a review (and a re-review doesn't pull it back up).

[AmyC]

Your calculations look good. Let me guide you back to Sch E.

1. Log into your return
2. Pick up where you left off
3. Select search/magnifying glass
4. Enter the exact words rental property
5. select the first entry, Jump to rental property