tax question regards primary residence partial renting

[leeloo]

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

Renting Part of Property

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.

[tututu1]

@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. 

[NCperson]

@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? 

[Critter-3]

@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.

[leeloo]

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...

[tututu1]

@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? 

[tututu1]

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. 

[NCperson]

@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.  

[tututu1]

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 :(

[NCperson]

@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. 

[tututu1]

thank you @NCperson , does this mean i had to use itemized deduction instead of standard deduction? 

[Critter-3]

You can use either itemize deductions or the standard deduction ... whichever is best for you.

[tututu1]

@Critter-3 ， thank you, actually i talked w/ the CPA my friend hired, what he said is to consider rent under fairmarket is comparing 1 bedroom rent vs fair market 1B price, say total for a 3B TH is $3600, then even if only rent out 1 bedroom, it still comparing your rent vs $3600/3=$1200. not $3600/number of people because tenant only rent 1 bedroom no matter how many bedrooms in the house. and it needs to be significant lower like $800 vs $1200. so the CPA said since i charged $1300, that is about fair price and very difficult to argue.

so CPA still think it had report as for profit renting, because using square foot method (10%) to divide expenses, there is a well income like $5000, so it cannot even report as for no-profit purpose. 

that is why based on this, i am asking can i use other methods for expenses can result a higher deduction, 10% is basically nothing!

thanks. 

[NCperson]

@tututu1 - maybe the opinion of another CPA is necessary (and don't understand why you are asking an anonyous board if you want to depend on a CPA)

While I am not an expert, if 1 bedroom represents 10% of the square footage of the house, and I rent out 1 room of a 3 room house and give the roommate the run of the house, I am renting out more than 10% of the house to him.  He has use of the kitchen, family room, hall bathrooms, the unused 3rd bedroom etc, etc, etc.  I am renting out 50% of the house to him as we both have unfettered access to the entire house (other than our personal bedrooms)

if he was limited to the bedroom and no other access to the house, I could buy the 10% argument

just my two cents. 

[tututu1]

@NCperson thanks and that CPA is a friend of my friend so i just ask an opinion. i think what he said make sense that it is always assumed that renting a bedroom=rent out common area as well, like if tell tenant cannot go to common area, i donot think anyone will rent it unless price extremely low like $300/mo.

and he mentions i think is very important that it is not what we think make sense, it is if IRS will think it make sense or not as it is difficult to argue with IRS and we not really want to put ourselves in that risk at all. 

so do you think reporting this as for profit renting makes more sense? thank you again,