Tax Prep by Deb Posted January 9, 2014 Report Share Posted January 9, 2014 I have a client coming in Saturday who purchased a home in 2012. In January of 2013 she began renting out two of the bedrooms. The kitchen, family room, guest bath are all common shared rooms. Am I correct that she deducts rental expenses on just the square foot of the rooms she is renting, not taking anything into consideration of the common areas? I am having her get me the total square footage of the home and then the square footage of each of the two bedrooms. Am I on the right track here? Also if this turns out to be a loss, (If any it will be very little) is she allowed to claim the loss like other rental property subject to the rules? Thanks in advance! Deb! ps. Let the fun begin! Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted January 9, 2014 Report Share Posted January 9, 2014 I would say the exclusively rented areas are the only portion that can be deducted. I am only aware of one area of the code where mixed personal/business use of a space is allowed, and that is for day care providers. Tom Hollister, CA Quote Link to comment Share on other sites More sharing options...
frazzled Posted January 9, 2014 Report Share Posted January 9, 2014 Pub 527, Chap 4 pg 16: Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the prop-erty 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, qualified 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 normally are 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 cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. You do not 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 if you 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 of 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 ex-ample, 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 be-tween rental use and personal use. If your heat-ing bill for the year for the entire house was $600, $60 ($600 × .10) is a rental expense. The balance, $540, is a personal expense that you cannot deduct. Hope that helps Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 9, 2014 Author Report Share Posted January 9, 2014 Yes, I had already read that and was pretty sure I was on the right path. If this does generate a loss however, is she allowed to take it the same way as if she was renting the entire house? Deb! Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted January 9, 2014 Report Share Posted January 9, 2014 is she allowed to claim the loss like other rental property subject to the rules? Sorry, no. The tax code is not very generous in this situation. First of all, you are right that you can only deduct expenses allocated to EXCLUSIVE tenant use. Kitchen privileges don't count. Then, you must follow the rules for a "dwelling unit used as a home." See Worksheet 5-1 in Pub 527. Basically you can deduct a share of mortgage interest (acquisition only) and taxes on Schedule E, along with business costs like a use permit or advertising. If that generates a loss, it's probably not for profit anyway. The rental share of other operating expenses like utilities and repairs is only deductible to the extent of remaining income. Quote Link to comment Share on other sites More sharing options...
joanmcq Posted January 9, 2014 Report Share Posted January 9, 2014 I rent out my driveway. Could never figure out how to do a percentage of mortgage & taxes for that income So....anyone have any ideas? Quote Link to comment Share on other sites More sharing options...
Tax Prep by Deb Posted January 9, 2014 Author Report Share Posted January 9, 2014 Sorry, no. The tax code is not very generous in this situation. First of all, you are right that you can only deduct expenses allocated to EXCLUSIVE tenant use. Kitchen privileges don't count. Then, you must follow the rules for a "dwelling unit used as a home." See Worksheet 5-1 in Pub 527. Basically you can deduct a share of mortgage interest (acquisition only) and taxes on Schedule E, along with business costs like a use permit or advertising. If that generates a loss, it's probably not for profit anyway. The rental share of other operating expenses like utilities and repairs is only deductible to the extent of remaining income. I looked at the worksheet 5-1 and read the surrounding info, but I think my situation is more like frazzled commented on. This seems to apply if my client also used the rooms she rented out for her own use. These rooms are exclusively rented to the tenant. My client does not enter or access these two rooms during the year, and they were rented at FMV for 365 days in 2013. I don't know if this changes anything, but that worksheet is more geared towards her using those rooms also. The example Frazzled referenced from the same publication fits my situation, but doesn't address deducting any losses. The heading directly following her reference deals with not for profit and it specifically states no losses allowed, nor no loss carryovers. Thanks, Deb! Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted January 9, 2014 Report Share Posted January 9, 2014 That worksheet is more geared towards her using those rooms also. No. If she used the rooms personally there would be no deduction at all. It would be different if the rooms were a separate cottage on the property. But this is a dwelling unit used as a home, so those rules apply. She can only deduct a loss from interest and taxes (because those are deductible in any case). Deductions for utilities and household expenses can not exceed income. Quote Link to comment Share on other sites More sharing options...
Mr. Pencil Posted January 9, 2014 Report Share Posted January 9, 2014 I rent out my driveway. Any reasonable method, such as square footage or FMV. No deductions if you walk up the driveway yourself, use it for storage, or other personal use. Quote Link to comment Share on other sites More sharing options...
joanmcq Posted January 10, 2014 Report Share Posted January 10, 2014 Any reasonable method, such as square footage or FMV. No deductions if you walk up the driveway yourself, use it for storage, or other personal use. Well, I don't use the part the trailer is parked on... Ah, deduction would be minuscule anyways. Quote Link to comment Share on other sites More sharing options...
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