Entering Personal Use Days versus Rental Use Days

[pattysamsel63]

I'm amending 2019 taxes. I began renting out a room in my home in July 2019, and she moved out at the very beginning of April 2020. We shared common areas. It is the only house I owned in 2019, thus I consider it to have been my principle residence. Even though I began attending college full-time in a neighboring state about mid-July, I regularly commuted back to the house for weekends, days off school, August school break, Thanksgiving break, and half of December in 2019. In 2020, I was only enrolled in school until March 2020, but it was all online, thus largely from the same house. My two sons were full-time, out-of-state students, but it was also their principle residence, and they came back in July for their school break, and again for holiday/winter breaks.  Thus, I consider it my principle residence for 2019, and it was my only residence from 2003 through approximately mid-July 2019. I only just found confirmation from an email of exactly when the other tenant moved in, and also only just recalled my sons were both living in the house during their school break in July, thus I need to change the days allocated to rental versus personal use.  Also, the room I rented out was not the tenant's primary residence. She owned and lived in a house with her husband in a neighboring county, and on a consistent, every-other-week basis alternated spending 4 nights per week at her own home versus 3 nights per week at her home, but also spent additional other days at her home when off work, such as for Federal holidays and sick or personal time off work. I'm concerned because the software for schedule E will not allow me the number of rental days and personal use days to total more than 365 days, yet we were both living in the house at the same time, although I did not use her bedroom once she moved in. The tax forms then display my principle residence as a "vacation" home. How do I change that? Also, won't this result in "non-qualified use days" when I go to sell my house which will then reduce what can be excluded for capital gains which does not seem fair as it was my principle residence? Also, when getting help over the phone, the "advisor" insisted it was a "business" and not  "not-for-profit," and not just for investment, even though I read in multiple places usually this type of situation would be considered "passive investment income," and it was an investment rental and not a business rental. However, the 1040X and schedule E forms make it appear as a business in my opinion. 

[Critter-3]

Ok ... let me see if I can explain personal VS rental use days since this is only a portion of your home.   Once you place a portion of your home into service as a rental  then that portion of the home  is no longer used personally  thus your personal use days once you have a rental will always be zero.  Days used personally before or after the rental is in service do not count as personal days ... read the screen instructions. 

[pattysamsel63]

Thank you.

[pattysamsel63]

Why on my 1040X, or maybe it is on the Schedule E, is it showing up as a "vacation home." It is not a vacation home. 

[pattysamsel63]

For simplification, I will make up some numbers, and pretend the room was rented out for 1 full year. In that case, would putting "zero" for personal days due to renting one bedroom of the five bedroom home, result in the IRS not realizing this was my principal residence? It was the only home I owned. I have never owned more than one home, and I continued to use it both to store all my and my son's belongings and furniture, my food, and continued to often sleep in and use the home. We both were just trying to reduce for some days, how much we had to commute. Also, will the new law treats it as non-qualified use - the same as if the entire house was non-qualified use - in such a way that it will affect the amount of capital gain that is taxable when I sell the home? I know that if I owned a home for 6 years, and rented the entire house for 2 entire year of the six years , that generally speaking the gain that can be excluded from tax is reduced then by 33.3%, as it was rented for one third of the time. However, in this case we are talking about renting out just a bedroom and attached bath where I maintained personal use of the rest of the house. 

[pattysamsel63]

I was considering renting a bedroom next year, while I live full time in this house, so that is another reason I really need to understand  the answers to the above two questions.

[Critter-3]

Read up on the rules in the IRS publication 527.

[pattysamsel63]

I've read Pub 527 multiple times, but what I am asking is not answered.  I've also read I.R.C. § 121(a) (Exclusion Gross income from sale of the property) which states if I meet the 2 year rule -  which I do - up to $250,000 in capital gains can be eliminated when I sell the home, except there are some limitations on how much of the gain can be excluded from tax, so not everyone would qualify to get the full $250,000 of gains excluded from tax even if they met the 2 out of 5 year residency test.  As explained in I.R.C.§ 121(b)(5) (A) Exclusion Of Gain Allocated To Nonqualified Use: "In General —  Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use."Regarding I.R.C. § 121(a)b)(5)(B) (i)(ii)  "Gain Allocated To Periods Of Nonqualified Use: For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which - (i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to (ii) — the period such property was owned by the taxpayer." A tax professional from TurboTax on the phone warned me that if I rent out a bedroom while living in my house next year - so I would consider it my principle residence which seems to be the criteria IRS uses,  the IRS, according to this tax expert, might consider that a period of "nonqualified use." Presumably this is because I would not be using the rented bedroom, thus would be documenting "Zero" personal use days, as there is no way to show we are both sharing the same residence even if we do not share bedrooms. So, do you think that if next year, for the entire year from 1/1/23 to 12/31/23, I rent out one bedroom of my principle and only residence, and I report "Zero" personal use days, and 365 rental days - because the question only relates to the bedroom I am renting out - when I sell the house will the IRS consider me to have accrued any "nonqualified" days in 2023 which would then result in less capital gain that qualifies for exclusion from taxes? I you are uncertain, can the question be elevated to a tax expert who is familiar with how the IRS treats tends to determine how much of the capital gains can be excluded when someone rents out a single bedroom of their primary residence as opposed to renting out an entire home that the renter is not living at. 

[gjchebert]

It's showing as a vacation home because Schedule E is the vacation home form.  I have two homes, a main one in Ann Arbor and a cottage in Northern Michigan.  If I rented the cottage out full time like a rental home, it would be a business and I would use a Schedule C.  However, I stay there sometimes and rent it sometimes. so it is a vacation home.  I have a personal home mortgage on it.  If it were a Schedule C I would need a commercial mortgage and commercial insurance at a higher cost. (We are allowed no more that two personal homes.)  Since your room in in your home, the room is treated as a vacation home, as though it was a little cabin inside your home. And you get the benefits of it being a home rather than a business.

[gjchebert]

Here is another answer from the TurboTax help screen on the Property Profile:  

"Rental and Royalty Property

What is a rental property?
In general, rental property is real estate that's leased or rented out to others, with some exceptions.

The most common exception is if the average stay at your property is 7 days or less. For example, you rent out your home or a space in your home as a bed and breakfast or using the popular website, Airbnb.

If your rental property falls under this or any of the less common exceptions, you'll have to report income and expenses from your property in the Profit or Loss from Business section (in TurboTax Home & Business) or Business Income and Expenses section (all other versions of TurboTax)."

[pattysamsel63]

In my case, it was a long-term rental situation, but thank you for explaining that as that could be very useful information for someone.