tax question regards primary residence partial renting

[tututu1]

Hi, i own my primary residence house and rent out one bed room (10% of total square footage) out of 3 rooms, and have questions:

turbo tax only want to use square foot method to split both rental related expenses, property tax as well as depreciation, but since there only 2 people live in the house, does it legal to use different method to maximize deduction and minimize depreciation?:

1, for utility expenses, can i split based on number of people by 1/2? 

2, for property tax, insurance, HOA, can i split by number of people, thus 1/2?

3, then for depreciation, can i change to square foot method, thus deduct 10% only to prevent tax recapture raise up bracket when sell?

thank you for help! 

[Mike9241]

see a tax pro because I don't think Turbotax can allocate expenses the way you want. if you're deducting 50% of the expenses that seems to imply the tenant is using 50% of the total area so depreciation should be based on 50% 

[tututu1]

hi, i am asking does IRS legally allow separate allocation or IRS only accept square foot method? thanks. 

[Hal_Al]

You can do it either way (there is some disagreement about that in this forum), but I think you must be consistent.  I'm of the opinion that you can't use one method for expenses and the other for depreciation.  But, others, later in this thread, say you can. To use the one half method, you tenant  must have full run of the house. 

But, the question may be academic. You may only claim enough depreciation to get your net rent to zero. You may not claim a loss when renting out part of your home  (the personal use rule). 

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Roommate  rental

If this is merely a cost sharing arrangement where the amount paid is below fair market rental, there would be no reportable income to you. If the “rent” amount is fair market value, or more, there is still some question as to whether you even have to report it, as it almost always comes out zero. Most people take the attitude that it is not income; it's just room mates sharing expenses and ignore it. Family, as opposed to unrelated roommates, makes that position stronger.

Here’s what you may be required to do:

Report the income (enter at Rents & Royalties/Income & expenses from Rental Properties); and then deduct the expenses on schedule E. If the room mate has full run of the house, and there's just the 2 of you, then half your expenses are deductible (mortgage interest, property taxes, insurance, utilities, repairs, and depreciation [if needed}). Your net income will usually be less than zero.

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.

It is possible for you to gain a positive tax effect from this activity; If enough of your schedule A deductions (mortgage interest &  property tax) are shifted to Schedule E, and your standard deduction becomes bigger than your itemized deductions, you will have effectively saved on taxes.

If you have no mortgage, then there could well be profit involved, which you may have to offset with depreciation that could lead to "recapture" in the future when the property is sold.

https://www.irs.gov/publications/p527/ch04.html#en_US_2014_publink1000219159

TurboTax (TT) does not handle this properly. TT will not limit your deductions to your income. You have to do that manually. TT wants you to enter this as a “not for profit rental”, which does not use Schedule E and puts your expenses on Schedule A (itemized deduction). I'm of the opinion that's not the proper way.

[Carl]

1, for utility expenses, can i split based on number of people by 1/2?

Yes. You can deduct utilities based on percentage of floor space, or percentage of resident occupants that pay rent for that space.

2, for property tax, insurance, HOA, can i split by number of people, thus 1/2?

Same as above.

3, then for depreciation, can i change to square foot method, thus deduct 10% only to prevent tax recapture raise up bracket when sell?

I recall this being asked before, and at the time I "looked it up".  If I recall correctly, for depreciation you don't get a choice. Your depreciation percentage is based on the square footage of the living space that is exclusive to the renter. An equal percentage of the land is allocated for that also.

One thing you want to check outside of taxes, is the property insurance. Typically, property insurance for your primary residence or 2nd home does not cover claims incurred as a result of business use of any portion of the property. But it depends on quite a number of factors such as state/local laws and what it says in your policy. Still, you should check that out to cover yourself.

[tututu1]

seems there are contradict reply, so does it legal to use different split method for depreciation vs expense deduction? any IRS rule saying anything? thanks. 

[Hal_Al]

It's not unusual to get contradictory opinions in this forum. That's all they (usually) are, opinions, unless a source is referenced (and maybe even then).

Carl seems to remember having seen it before.  I'd go with that. It's probably going to be academic as the amount of depreciation you can deduct may be limited.  That said, here's another opinion on that issue (deductions limited to income when personal use is involved): https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/re-i-rent-out-a-room-...

[NCperson]

@tututu1 - let me ask a fundamental question.... why are you wanting to go through all these hoops? what is the benefit to you if as @Hal_Al opines, there is no benefit in the end as there can be no losses......sounds like a lot of work that gets nowhere???? 

How many millions of homes have an owner who has a roommate to share expenses?  is that really taxable income or just someone helping out with the expenses. 

is the roommate limited to using just the 10% of the house he occupies or does he have access to the common areas (kitchen, living room, etc. etc.etc).  Assuming he has run of the common area, is his rent half of what the house would rent for? if less than 50%, then isn't that "less than market"? 

[Carl]

why are you wanting to go through all these hoops?

When it comes to depreciation, most folks don't realize or are just not aware that depreciation is not a permanent deduction. I myself prefer to keep my depreciation as low as I legally can. That's because when you sell the property you are required to recapture that depreciation in the tax year you sell it. Even keeping my depreciation as low as I legally can, I still show a loss on SCH E. Several things to keep in mind when it comes to recapturing depreciation.

1) You are required to recapture depreciation taken, or the depreciation you should have taken in the tax year you sell the property. So not taking depreciation is of no benefit.

2) Recaptured depreciation gets added to your AGI. This has the potential to bump one into the next higher tax bracket.

3) There is also the potential to disqualify one for tax credits they may otherwise qualify for without the recaptured depreciation increasing their AGI.

[tututu1]

Hello, Yes, to prevent it raise up too much AGI when recapture the depreciation, that is why i try to make rental footage as small as legally possible, like 10% of total area. but if i use the same proportion to split expense, then 10% of expense is not really enough to off set with rental income ($10K per year), so that is why i am asking will it be legal to divide by number of person for the expense to maximize deduction while using footsqure method to minimize depreciation. 

[Mike9241]

I think the answer to your question at least for the cash expenses depends on your particular situation. what portion of the property can the tenant use? can they use the kitchen, living room, dining room obviously the bath. in other words the whole house except for your bedroom, then I think you have a valid argument for deducting 50% of the cash expenses.  if they can't then the expenses are mostly attributable to your use and a 50/50 deduction would not be appropriate. 

[Critter-3]

The program will only use one method if you allow it to do the allocations so simply don't use the auto calculate option ... you must do the math yourself and make direct entries of the allocated expenses manually.

[Carl]

For depreciation, you can "only" use percentage of square footage.

For utilities, you can use "either" percentage of square footage, "or" percentage of occupants that are paying renters.

[tututu1]

so we are sure IRS legally allow split using different method for expense deduction vs depreciation? thanks. 

[Critter-3]

30 Years in the business with no IRS issues for any of my clients and neither have my mentors who have been in the business much longer.