room rental

[grandmabee]

client is getting ready to rent out a bedroom in home. would you set it up the same as regualar rental using the % of expenses per sq ft based on room size?

[Margaret CPA in OH]

Good question! My inclination would be to treat it as I do my home office with the appropriate percentages or one of x number of rooms. Don't forget the current appraisal minus the land.

[Pacun]

Yes, current appraisals or cost, whichever is lower, correct?

[Margaret CPA in OH]

Oooh, yes! I forgot about the changes in the market. That could make a difference, sadly.

[jainen]

>>treat it as I do my home office with the appropriate percentages or one of x number of rooms<<

Although this is common, there unfortunately is no authority for it.

For renting out part of a home, the vacation home rules apply to prevent claiming a loss. Furthermore, NO deduction whatsoever is allowed for expenses allocated to common areas such as the kitchen, bathrooms, or entryways. It can be even worse than that if the tenant is a friend or relative, which is usually all anyone would let move in.

It's not often possible to determine or document a profit motive, a reasonable division of costs, amount of personal use, and other elements of a genuine rental. Sometimes I'll take the mortgage and taxes in the ordinary way, and ask the client if their friend isn't just sharing expenses.

[Margaret CPA in OH]

Thanks, as usual, for chiming in, Jainen, with your keen observations and for setting us straight. I honestly did not (bad!) think through this carefully to determine whether there are such distinctions between home office and rental situations. It's so good that you did and shared that with us. I'll know better should this again arise.

[jainen]

>>whether there are such distinctions between home office and rental situations<<

Well, one obvious difference is that a home office has nothing similar to the vacation home rules under Section 280A.

But in my opinion, the IRS position does make more sense in that it reflects the actual economic reality of most of the room rental situations I have seen. (The rules are different for short-term rental like a hostel or B&B, or if the tenant lives in a separate structure on the property.)

[grandmabee]

>>treat it as I do my home office with the appropriate percentages or one of x number of rooms<<

Although this is common, there unfortunately is no authority for it.

For renting out part of a home, the vacation home rules apply to prevent claiming a loss. Furthermore, NO deduction whatsoever is allowed for expenses allocated to common areas such as the kitchen, bathrooms, or entryways. It can be even worse than that if the tenant is a friend or relative, which is usually all anyone would let move in.

It's not often possible to determine or document a profit motive, a reasonable division of costs, amount of personal use, and other elements of a genuine rental. Sometimes I'll take the mortgage and taxes in the ordinary way, and ask the client if their friend isn't just sharing expenses.

so are you just claiming the full interest and taxes on sch A and then the income from sharing expenses is not accounted for on the tax return?

My case is not friend or relative just needed extra income in these times. I believe it is rent income and was showing only 10% of utilites and int and taxes, insurance which was the sq ft of bedroom only compared to whole house no common use area. It was not a loss

[mcb39]

I believe I would have done the same as bcolleen. This is a reasonable reporting of income and expenses as allocated to the one room that is rented out. IMO

[jainen]

>>This is a reasonable reporting of income and expenses as allocated to the one room<<

It may seem reasonable to you but in my opinion the tax code has more authority than reason. I don't think expenses should be deducted unless the law allows it.

[MAMalody]

Pub 527 page 17 seems to agree with the % allocation method.

[mcb39]

Pub 527 page 17 seems to agree with the % allocation method.

Yes, and that paragraph of that publication states that you can use any REASONABlE method to arrive at your calculations. Apparently tax law does allow it.

[grandmabee]

>>This is a reasonable reporting of income and expenses as allocated to the one room<<

It may seem reasonable to you but in my opinion the tax code has more authority than reason. I don't think expenses should be deducted unless the law allows it.

what would you do with the money received? all taxable or take the position that they were sharing expenses and not claim any money received

[joanmcq]

what would you do with the money received? all taxable or take the position that they were sharing expenses and not claim any money received

I rent a room and report the income. No expenses (roommate pays part of utilities). The fraction of mortgage interest & taxes isn't worth the hassle of figuring it out.

[jainen]

>>isn't worth the hassle<<

It is my general understanding that this is far and away the most common opinion of people who rent out rooms. Expenses are sometimes but rarely taken on Schedule A or Line 36, or perhaps informally netted on Line 21 if not simply ignored.

[mcb39]

>>isn't worth the hassle<<

It is my general understanding that this is far and away the most common opinion of people who rent out rooms. Expenses are sometimes but rarely taken on Schedule A or Line 36, or perhaps informally netted on Line 21 if not simply ignored.

It is my general understanding that the income is also sometimes but rarely taken, if not simply ignored. Many taxpayers simply "forget" to mention it. I am not suggesting that this is correct, but simply a fact of checks and balances, as long as we are on the subject.

[jainen]

>>taxpayers simply "forget" to mention it<<

Of course I encourage clients to fully explain their financial circumstances to me, but room rent very often is indeed nothing more than cost sharing, albeit undocumented. In that case clients don't consider it to be income, and neither does the tax code.

[Tax Man California]

>>taxpayers simply "forget" to mention it<<

Of course I encourage clients to fully explain their financial circumstances to me, but room rent very often is indeed nothing more than cost sharing, albeit undocumented. In that case clients don't consider it to be income, and neither does the tax code.

If the house is owned? How is it cost sharing? I can buy that logic on a sub renting a rental. He is using income to pay his mortgage etc. Schedule A deductions would be prorated between schedule A and E. Utility expenses would be a prorated on schedule E only, etc. Also, he needs to depreciate the room as a rental

chris

[jainen]

>>he needs to depreciate the room<<

The fact that he owns the house certainly does not mean he never needs help covering expenses! In fact, a mortgage often creates a cash flow problem that aggravates expenses. At the same time, a homeowner most likely will not have a profit motive in the sense of seeking the highest rent available in the market, but will be very choosy about the roommate's personality and lifestyle, perhaps even with restrictions that are illegal for a business.