I think you are misunderstanding the reply given.
- You have a physically separate structure on your property that is 100% business use by a business that you report on SCH C as a physical part of your personal 1040 tax return.
- You have a room in your main residence that you are renting out to another, and you report this on SCH E as a physical part of your personal tax return.
Both of the above are a business. The SCH C business produces earned income, sometimes referred to as active income. To get that income you have go out and "DO SOMETHING" on a recurring basis to get that money.
The SCH E business produces passive income. You do not do "ANYTHING" on a recurring basis to get paid that money on a regular basis. All you do is "sit there" doing nothing for this money on a recurring basis, other than collecting it.
Since the SCH C business is physically located in a physically separate structure, then treat it that way for tax purposes.
First, determine the total square footage of all structures on your property. Then determine the square footage for the SCH C home office building "ONLY". Now divide the SQ FT of the office structure by the total SQ FT of all structures on your property. This will give you the percentage of the total square footage that is SCH C business use only. So if the total square footage of all structures on your property is 1000 square feet, and the separate structure which you use 100% for the SCH C business is 250 square feet, 250 divided by 1000 is .25, which means the home office structure occupies 25% of your total square footage.
Therefore, you can claim 25% of your mortgage interest, property taxes, homeowners insurance, and utility bills as a SCH C business expense. Additionally, 25% of your cost basis in the property (structure value only) will be used for depreciation over the next 39 years.
There is one exception. If you have only one landline telephone number in the house, then you can NOT claim one single penny of your phone bill as a business expense. The IRS says you can't. You would need to have at least 2 lines, and that 2nd line could be for the business only, and therefore the cost of that 2nd line would be a 100% business deduction.
Also, when it comes to utilities, if you don't have water going to the separate business structure then you can not claim any percentage of your water bill. Same holds true for your other utilities such as cable, satellite, electric, gas, etc.
When my roommate eventually moves out, the percentage allocated to my home office will go down.
No, it will not. It will remain the same. Under no circumstances do you change the cost basis or percentage of business use of a real estate asset, once entered. There are no exceptions.
using my above total of 1000 sq feet, you already have 25% of that allocated to a SCH C business. So lets say you rent out a room in the residence house that is 200 sq feet. That would be 20% of the total. Your total square footage "DOES NOT CHANGE" for any reason.
So on the schedule E you'd indicate that you rent out 10% of your floorspace for the "exclusive use of the renter". Then you'll be able to claim as a rental expense, 10% of your property taxes, mortgage interest, and property insurance. Additionally, 10% of your cost basis in the property (structure value only) would be depreciated over 27.5 years.
So with my numbers, 25% of your mortgage interest, property taxes and insurance would be deductible as a business expense on SCH C, and 10% of your mortgage interest, property taxes and insurance would be deductible as a business expense on SCH E.
For depreciation, 25% of your total structure value would be depreciated over 39 years on SCH C, and 10% of your total structure value would be depreciated over 27.5 years on SCH E.
So if you close the business down the road, your percentage for the rental DO NOT CHANGE. Likewise, if you convert the rental portion back to personal use, your percentages for the SCH C business DO NOT CHANGE.
