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!
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%
hi, i am asking does IRS legally allow separate allocation or IRS only accept square foot method? thanks.
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.
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.
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.
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-in-my-primary-residence-while-i-actively-manage-this-room-rental-am-i-allowed/01/2501870#M81751
@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"?
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.
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.
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.
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.
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.
so we are sure IRS legally allow split using different method for expense deduction vs depreciation? thanks.
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.
I always like to go to the horse's mouth. I didn't see the statement that any portion of the common area is treated as a personal portion, but it is written somewhere. An interpretation of this might be that if only one room is rental and the balance of the house is common area, then any expenses directly related to that room are deductible and since the common areas are personal use, then how is your tenant responsible for 50% of HOA, and taxes?
Pub 527
If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property.
You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). You can also deduct as rental expenses a portion of other expenses that are normally nondeductible personal expenses, such as expenses for electricity or painting the outside of the house.
There is no change in the types of expenses deductible for the personal-use part of your property. Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040).
You don’t have to divide the expenses that belong only to the rental part of your property. For example, if you paint a room that you rent or pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. If you install a second phone line strictly for your tenant's use, all the cost of the second line is deductible as a rental expense. You can deduct depreciation on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes.
How to divide expenses.
If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. You can use any reasonable method for dividing the expense. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. The two most common methods for dividing an expense are (1) the number of rooms in your home, and (2) the square footage of your home.
Example.
You rent a room in your house. The room is 12 × 15 feet, or 180 square feet. Your entire house has 1,800 square feet of floor space. You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. If your heating bill for the year for the entire house was $600, $60 ($600 × 0.10) is a rental expense. The balance, $540, is a personal expense that you can’t deduct.
@leeloo , thanks for the IRS link, it clearly said here: The two most common methods for dividing an expense are (1) the number of rooms in your home. since there only 2 bedrooms, the 3rd one is converted for working due to WFH actually, so that is why i say 50% or 33% based on this # of room method. but if use square foot method, it will only be 10%, so clearly # room method or # people method gives more deduction to minimize rental incomes, so that is why i am asking can i use this method for expense deduction while using square foot method for depreciation to prevent higher tax bracket issue later after recapture.
@tututu1 - I think if you go back and review the the entire thread there is a question whether you have to report any of this as income at all..... forget the income, forget the depreciation, forget the expenses, etc. suggest re-reading what @Hal_Al wrote above.
are you making something very complicated that can be simplified?
@tututu1 LOL ... so your home only has bedrooms ? No kitchen, family room, dining room or bathrooms? If you are using the "room" method all rooms must be counted not just the bedrooms and all the rooms must be of the relatively same size. This comes in handy for things like identical duplexes where the owner lives in one half ... so you are renting 1 of 2 units. Otherwise use the square footage method.
The key word is reasonable, not beneficial. Plus, the IRS example stated flatly that this was the precedure to follow. Plus what Critter said. You care aboutr doing this correctly, or else you would not be asking the question in the first place. My personal criteria when I am in a dilemma regarding the right route if how comfortable I would be explaining my position to the IRS.
In regards to the roomate situation, again, the key is are you renting for Fair Rental Value. Here is a good link that show how the roomate situation might work: https://ttlc.intuit.com/community/tax-credits-deductions/discussion/if-you-are-not-renting-a-portion-of-the-home-to-your-girl/01/35207#M1692
@NCperson , thanks for your reminder, now i realized there is a chance that it may not even need to be reported?
but how would i determine if my rental income had to be reported? what i rent out is someone totally unrelated, not a family member.
i see IRS saying even it is not for profit rental, still need to report rental income? and does in this case we donot report depreciation and can enter full amount of mortgage, utilities, property taxes on schedule A? and filing form 5213 after 5 years?
i saw a link that saying enter as not for profit rent may result in a bas tax situations?
https://www.april15th.com/trust-estate-taxes/not-for-profit-rentals-result-in-bad-tax-consequences/
so does treat it as roommate sharing experience, thus report as not for profit really going to help me compared with reporting as for profit rental as turbo tax guided me?
thanks.
@tututu1 I go back to this comment above:
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.
1) how much would your house rent for if you rented the whole thing out (and you didn't live there)?
2) how much are you charging your roommate? (and I assume he has run of all the common areas).
3) if 2) divided by 1) is less than 50% then it is below fair market rental.
start there and note the comment in bold.
thank you @NCperson ,
1) how much would your house rent for if you rented the whole thing out (and you didn't live there)? i checked the rental website for a 3 bedroom TH, total rent will be $3687
2) how much are you charging your roommate? (and I assume he has run of all the common areas). i charged $1300.
3) if 2) divided by 1) is less than 50% then it is below fair market rental. result is 35%.
so do you mean in this case i donot need to report anything or report as not-for-profit?
my friend who runs similar case like me hired a CPA and report his rental as additional income and deduct expense based on square foot method (15%), that turns out about $3000 capital gains on him :(
@tututu1 - correct - you are just two roommates helping each other out with expenses. it's not income to you based on all the comments in this thread. And you are charging him less than 50% of what the market rent for his share of the house is, so that is 'below market'.
You can deduct all your mortgage interest and real estate taxes on Schedule A if you itemize.