Rental income from rooms at primary residence

[trapezewdc]

I am using TurboTax Premier online.

I have a rental property and I've entered all income/expenses...etc into TurboTax. I do not live at this rental property. I also have some rental income from renting out my rooms at my primary residence so where do I enter this income ? Do I add my primary residence as another rental property and complete that like my rental property, which is really not what I want to do as I don't intend to depreciate part of my primary residence and all other stuff, or do I enter that somewhere else as an ordinary income ? However, I feel I will get more tax benefits treating it as rental income than ordinary income. Thanks.

[RobertB4444]

You will get more tax benefits treating it as rental income.  And that's how you're required to treat it.  

You have to enter your primary residence in as a rental property and then enter in the percentage of the home that is rental property.  You'll base this on square footage.  

So whatever percentage of the square footage is rented you will deduct that percentage of the bills on the house.  For instance, if you have a 2000 square foot house and you are renting 500 square feet you are renting 25% of your home so you get to deduct 25% of your electricity bill and property taxes and lawn service and any other bills that you have for the entire house.  

In addition, you will be able to deduct any direct expenses that you have for the renters.  For example, if you buy new furniture for those rooms that you are renting then you can deduct 100% of that.  

You will also have to depreciate the portion of your home that you are renting.  IRS rules require you to take the depreciation year to year and recapture it at the sale of the home.  If you don't take it year to year you will still be expected to recapture it later.

Here are the rules on renting out a portion of your home.

@trapezewdc 

[trapezewdc]

Thanks.

About square footage. Tenants have dedicated rooms however they also equally share the rest of the house with me. Do I also include 50% of the shared square footage to their dedicated rooms square footage as the total square footage ?

The example from you :

Total square footage  : 1500/2 + 500 = 1250

Percentage : 1250/2000 x 100% = 62.5%

Would this be correct ?

[PattiF]

No, you can only consider the square footage of the actual room that is rented even though the renter has access to the whole house.  

Only the exclusively used area is considered rental area. The common area is available to all and is not a factor in the allocation of expenses.

@trapezewdc 

[trapezewdc]

Thanks.

While working to add my primary residence as another rental property, TurboTax asks me to include security deposits as income. The security deposits will be returned once the tenants move out so why are they considered as rental income ? I also learned this on TurboTax community as well as from other TurboTax Experts in the past. See below screenshot.

[AmyC]

Correct! Security deposits do not become income to you until you have kept they income after they move out and do not return it.

Reference:

Real Estate Tax Center

Rental Real Estate and Taxes 

[trapezewdc]

I am using Turbox Live Premier online. I want to follow up on the rental percentage. Below is a screenshot from my tax return. It says for rental percentage I can base it on the number of rooms rented to total rooms. However, this will be a different percentage number compared to if I use square footage method. Thoughts ? Thanks.

[KrisD15]

Yes, you can use either method, rooms or square footage. Choose what makes more sense in your situation. 

Whichever you choose, use that same method year after year. 

Additionally, Security Deposits HELD are NOT income. 

Only when you KEEP a security deposit from a former tenant (for damage or breaking the lease) does it become income. 

[SMGriffith]

This is very helpful, thank you! For purposes of doing the info reporting for depreciation, how do you report historical information that predates (by decades) a portion being rented out? For example, house purchased in 2000 has 2000 square feet, with a 400 sf garage, so garage is 20% of the total square footage.  In 2010, expansion increases the house size to 2500 sf (still with a 400 sf garage), so garage is then around 14% of total square footage.  In 2022, garage is converted to rental unit. When doing the initial information for depreciation, which includes the cost of the property, do you report the entire purchase price for the house & land or just the percentage that covers the garage? If just the garage, do you use the percentage at the time the house was purchased or the one as it exists at the 2022 conversion?
Thank you very much!

[DianeW777]

It depends.  It will be easier to track your rental depreciation if you use only the garage portion of the cost that is now a rental.  If you started the conversion in 2022, meaning the garage was totally rental in that year,  you can make corrections so that the 2023 return is correct, then amend the 2022 to reflect the same original cost basis if necessary.

To arrive at the cost basis for this garage below will give some explanation on how to arrive at the amount.  For the first year you would include the total cost of the property from purchase to the date placed in service for rental.  

Use the original cost of each asset (including improvements before it is a rental), add those together then divide each one by the combined total to find the percentage of the cost for the garage.  Use that percentage times the cost basis to find the cost basis for depreciation. The cost basis must be the lower of actual cost or fair market value (FMV) on the date of conversion from personal use to rental use (usually cost is lower).

Use the date placed in service as the purchase date/conversion date.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

You do not need to include the land since it is not allowed to be depreciated.  

[SMGriffith]

Thank you so much!! Very helpful!