Homeowner renting a room full time

[Rentalrookie]

I had a question for you. Say I rent out my basement year round. I live in the upstairs. The downstairs has nearly everything to be a separate dwelling (bedroom, bathroom, kitchen) but no separate door and my home isn’t zoned as a duplex. 

When I figure out my expenses I will have a larger net loss initially. I would like to apply that to my other income and reduce my taxable amount. Is there anyway to do that, or take the $25000 rental loss or 20% pass through deduction? All I can find is that income from renting a room (in a residenc) is neither passive or active and all I can do is bring my net rental income to 0 and carry over the losses to next year?

I saw something that if you are renting the room/basement full time and never use it for personal use then it’s maybe doesn’t fall into the vacation home rules and would have better tax advantages?

Thank you!

[MaryK4]

You would definitely be able to claim your rental activity on your tax return.  In TurboTax, you will be able to designate the area and deduct the proportion of the basement area versus your personal living area.  A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional.  You would have the special allowance available to you unless the income phaseout kicks in.  

From the IRS: Special $25,000 allowance.

If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that’s disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing the passive activity loss. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.

If you had a loss on the rental, you would not be able to claim the QBID, but you may be able to carry it forward.  For information on the QBI Safe Harbor for Real Estate see Understanding QBI rental real estate safe harbor election.  (And sorry I am giving a lot of references, the articles are great summaries and please feel free to post more specific questions.)

[Rentalrookie]

Thank you for your response,

below is the article I am most curious about. Will my rental fall under these restrictions? In Publication 527, under the article dwelling used as a home. Or would my situation not qualify?

“Limit on deductions.

Renting a dwelling unit that is considered a home isn’t a passive activity. Instead, if your rental expenses are more than your rental income, some or all of the excess expenses can’t be used to offset income from other sources. The excess expenses that can’t be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Any expenses carried forward to the next year will be subject to any limits that apply for that year. This limitation will apply to expenses carried forward to another year even if you don’t use the property as your home for that subsequent year.

To figure your deductible rental expenses for this year and any carryover to next year, use worksheet 5.1”

[ColeenD3 · Accepted solution]

No, this situation refers to vacations home. In this circumstance, renters occupy the same space as homeowners, just during different time periods. You are dividing by space, not time. Your basement is 100% rental, while it is a rental, unless there is also personal use.

[Rentalrookie]

Thank you for your help!