Renting Out Room in Home with Mortgage Over $750,000

[Schadadle]

I have an interesting situation that I haven't been able to find the answer for. I purchased a home at the end of 2020 and started renting out a room in my home starting April 2021. I received a single 1098 that I now need to split between my Schedule A and Schedule E.

I did a bunch of reading from other posts, and am following this publication to work through it:

• https://www.irs.gov/pub/irs-pdf/p527.pdf

What I've done:

1. Calculated what % of the total square footage the rental portion is, and then multiplied that by .75 (9/12 months up for rent). Let's call this X.
2. I used X to split home-wide expenses, including mortgage interest and property taxes, on my Schedule E.
3. I then took the balance of the mortgage interest and property taxes on my 1098 and listed them as itemized deductions on my Schedule A.

I'm 99% sure I did the steps above correctly, but here's the kicker.

• The total mortgage balance listed on my 1098 is over $750k, so I wouldn't be able to deduct it all if I was only filing a Schedule A.
• However, if I multiply the mortgage balance by X, it drops below the $750k threshold.

Should I be dividing the mortgage balance along with the deductions between Schedule A and Schedule E? Or do they have to fall under $750k total? I know this is a bit weird because I don't think Schedule E rentals are restricted by that same $750k limit. 

Would really appreciate any clarity on this matter! Thanks!

[Vanessa A · Accepted solution]

  You are correct there in the steps you listed and regarding the Schedule E not having the same 750K restrictions.

And yes, you would multiple the rental area portion by the total balance as if it was a detached property with a separate mortgage that you would be claiming the mortgage interest on. 

[lyu]

Is my understanding below correct? For simplicity let's say principal of the loan is $1M, interest on the mortgage is $16k, and 25% of the house was rented out throughout the entire 2022.

Schedule E: claim $4k of mortgage interest (16k * 25%) 

Schedule A: claim $12k of mortgage interest (16k * 75%) 

• If TurboTax automatically reads in form 1098, we need to manually overwrite mortgage interest at this step from $16k to $12k
• Actual mortgage expense deductible in Sche A will be around $9k (calculated as 12k * $750K limit / $1M): this part is automatically handled by TurboTax (and it's just a shame to not be able to claim the full $12k even though we'd be right at the $750K limit if we removed the rental portion of the loan principle)

Is my understanding correct?

[PatriciaV]

No, if you enter the full amount from Form 1098 under Rental Expenses, TurboTax automatically allocates the correct percentage of the interest to rental expenses and the balance is transferred to Your Home under Deductions and Credits.

The rental portion is fully deductible on Schedule E.

[lyu]

Is the expected behavior:

• TurboTax reads in the full $16k mortgage interest on Form 1098
• 25% ($4k) will be  allocated to rental expense on Schedule E
• 75% ($12k) will be transferred to Schedule A as personal deduction

Will the $12k be prorated due to $750k limit?

[Schadadle]

For what it's worth, I jumped on a call with a TurboTax expert a couple months ago and these are the steps we took off his advice:

1. Calculate how much of the total mortgage can be deducted against the $750k limit
   • In your example of a $1M total, this would be $750k (or 75%)
2. Multiply the 75% against the total interest paid on your 1098 as the total deductible amount
3. Take the total amount deductible and split that between your Schedule A and Schedule E based on your square footage calculation (75%/25% in your example)

So unfortunately in your example, you do "waste" $250k in non-deductible interest. I would love to know if you heard something different from a different accountant, because I ended up not taking full advantage of my interest paid as deductible as well. 

[GeorgeM777]

No, it may not.  Therefore, you will have to manually calculate the remaining mortgage amount, the mortgage interest applicable to that mortgage amount, and finally calculate how much of the mortgage interest you can deduct on Schedule A given the $750,000 limit on aggregate mortgage indebtedness.  You are correct, in that you should enter your rental property information first (in your case the rental room) as TurboTax will allocate the appropriate percentage of expenses to the rental room including the allocable percentage of the mortgage.  

After entering the essential information about your rental room, you may see a screen indicating that the remaining portion of the mortgage interest, i.e., the mortgage interest that applies to your personal residence, will be transferred to Schedule A.  However, double check that entry to make sure it does not include mortgage interest that is allocable to the aggregate indebtedness greater than $750,000.  If it does, you will need to manually adjust the amount.   

Follow-up with us and provide additional information if appropriate so that we can better understand your tax situation.  

@lyu 

[ldc2]

 I also rent rooms in my home, and I may misunderstand the previous answer, or TT is just getting it wrong.   In the rental expense questionnaire on TT I checked Yes to let TT do the math. I entered the percentage as 30.0 and then entered the full mortgage expense.   The numbers shown for my deductions that will be applied to the rental portion look correct (total x 0.3).  But when I got to the section on my home mortage deduction (owners part), the amount supplied by TT was zero.  The name of the lender was correct, but TT did not transfer any of my mortgage to the homeowners section.  So if I were to use this method I don't know what number I should enter there.  

Did I do something wrong?  In the past I never trusted TT to get this right, and always did the calculation myself.  I'd recommend that approach still. 

[MarilynG1]

If you rent out 30% of your home, be sure that your business use is 30% in the Property Profile.

Your Schedule E Worksheet should show the total Mortgage Interest in Column A, the 30% amount allocated to the Rental in Column C, and the Personal % in Column E.

On Schedule A, you should see the personal portion of your Mortgage Interest on Line 8a.  You shouldn't enter anything in the Personal portion; the totals are entered in the Rental section, and the personal % is transferred over.  If you have no amount on Line 8a of Schedule A, try deleting/re-entering your numbers in the Rental section.

@ldc2