Room Rental of Primary Residence

[peggysioux]

If taxpayer is renting out two rooms in her primary residence, would depreciation be figured on the portion of the property that is rented out? I see in The Tax Book, it states that any reasonable method of allocating expenses between personal and rental use is allowed, but does not mention depreciation.

[MilTaxEA]

Yes, you take their basis (or FMV, if less) of the home and multiply that basis by the rental percentage to come up with the depreciable basis.

[taxea]

The allocation is based on the sqft of living area of the home divided into the sqft of room rented. Common areas are not included.

[Gretel]

In case you don't know, you cannot have a loss for such rental situations.

[ddoshan]

In case you don't know, you cannot have a loss for such rental situations.

Gretel .. could you elaborate on the above. If one cannot show a loss, it would seem to imply that you have a rental not for profit which would require reporting income on line 21.
I'm not so sure you could not end up showing a loss in the posters example.

[Gary2]

Gretel .. could you elaborate on the above. If one cannot show a loss, it would seem to imply that you have a rental not for profit which would require reporting income on line 21.
I'm not so sure you could not end up showing a loss in the posters example.

Read Pub. 527, specifically the Personal Use chapter. It's still reported on Schedule E, and any losses that are limited because of this rule will carry over to future years.

I think you're reasoning is backwards. A rental that's not for profit implies you can't deduct losses. But the inability to deduct losses doesn't imply that it's not for profit. The obvious examples are rental losses limited by the passive activity rules (either because they exceed $25K or the AGI is too high).

[ddoshan]

Some of these rental situations can get pretty confusing, at least to me. In the past I have read Pub. 527 over and over in regards to such. Without reading thru again at the moment, do you have to treat the property as all personal use. If you are renting out two rooms that are 100% for the renters and that makes up say 15% of the total area of the home ... aren't you allowed to show a loss if it worked out as such?

[MilTaxEA]

In case you don't know, you cannot have a loss for such rental situations.

I disagree. As long as they do not use the *rental portion* of the house for personal purposes during the year (and actively participate), then the losses are deductible.

[Gretel]

I disagree. As long as they do not use the *rental portion* of the house for personal purposes during the year (and actively participate), then the losses are deductible.

I still stand by my statement, as long as rental is not a separate structure and renter have use of other rooms in home. I did this wrong some years ago and was lucky that it never was audited.
Look at pg. 22 pub 527, lower right hand corner under limitations.

[ddoshan]

As mentioned always thought some of these rental situations get confusing to me. You may be correct but I am not totally convinced. Personally I still lean the other way.. that a loss would be allowable.. Page 21 1st column appears to indicate that the portion of a home used exclusively for rental would not be considered personal use, although not exactly on point as it does not reference a regular permanent type of renter.

[MilTaxEA]

I still stand by my statement, as long as rental is not a separate structure and renter have use of other rooms in home. I did this wrong some years ago and was lucky that it never was audited.
Look at pg. 22 pub 527, lower right hand corner under limitations.

And I still stand by my statement. Much the same way your home office becomes a "separate" entity from your home (depreciated over 39 years) if you meet exclusive use. You are not violating that exclusive use by using other parts of your house for personal reasons. The rental room become the rental "dwelling" and that portion of the house then become a rental property and all its expenses are deductible.

See these discussions (especially Riley2's comments):

http://www.taxalmanac.org/index.php/Discussion:280A_limitation_for_room_in_home%3F

http://www.taxalmanac.org/index.php/Discussion:Does_renting_part_of_home_fall_under_vacation_home_rules%3F

Edit: However, after looking at this issue more, it does appear to be more complicated than I initially thought. The home office example I gave is a poor explanation. I still think an argument can be made for the loss to be deductible based on the TaxAlmanac discussions.

[MilTaxEA]

Gretel, Prop. Reg. 1.280A-1(c)(1) would seem to support your argument that the expenses are limited under Section 280A unless 1.280A-1(c)(2) applies.

[dan doshan]

And I'll stand by mine right or wrong that an exclusively rented room is then not considered part of the home and a loss would be allowable.

[Gretel]

Gretel, Prop. Reg. 1.280A-1(c)(1) would seem to support your argument that the expenses are limited under Section 280A unless 1.280A-1(c)(2) applies.

From what I understand the exception applies only if rented rooms are used like motel rooms, which would make the whole activity go on Schedule C.

(2) Exception. Notwithstanding the provisions of paragraph (c)(1) of this section the term
“dwelling unit” does not include any portion of a unit which is used exclusively as a
hotel, motel, inn, or similar establishment. Property is so used only if it is regularly
available for occupancy by paying customers and only if no person having an interest in
the property is deemed under the rules of this section to have used the unit as a residence
during the taxable year. For example, this exception will apply to a unit entered in a
rental pool (see §1.280A-3(e)) only if the owner of the unit does not use it as a residence
during the taxable year.

[FEDUKE404]

I still stand by my statement, as long as rental is not a separate structure and renter have use of other rooms in home. I did this wrong some years ago and was lucky that it never was audited.
Look at pg. 22 pub 527, lower right hand corner under limitations.

I do not think the example you cited (http://www.irs.gov/pub/irs-pdf/p527.pdf - right column on page 22) is consistent with this discussion.

The beach cottage referenced in the IRS example had a fatal flaw when the actual rental property, viz the cottage, was also used for "excessive" personal use.

For the home-owner renting out rooms in the house, those rooms "stand alone" as separate rental properties. Hence the allocation of operating expenses, depreciation, etc.

Unless the home-owner uses those rooms for personal purposes, I do not see why a rental loss (properly calculated, of course!) could not be used as an offset to other income. Conceptually the situation is not that much different from a person who owns a duplex and rents half and lives in the other half.

FE