Rental expenses

[zahl]

I have a single client that owns a 5 bedroom home. He is renting out 4 of the bedrooms to 4 single men, they all have access to the common areas. My client pays all the utilities. My question is concerning how to prorate the expenses, depreciation etc. Can I report the income on Sch E and take a 4/5th of all the expenses including depreciation on 4/5 of the house?

[abby]

reasonable method

You can use any reasonable method, but the pubs for rental property do state that common areas cannot be considered part of the rental house because the owner gets personal benefit from those areas. This would mainly affect depreciation, so the portion of square footage that is not available to the owner would be a good basis for setting up depreciation.

You'd probably have to examine any Improvements, too for the extent of personal benefit. For example, you might treat a new roof differently than a new refrigerator

Four fifths could reasonable appy to expenses such as utilities I would think, in most circumstances.

[Gretel]

Room rental

Also keep in mind that rental expenses are limited to rental income.

[abby]

personal use of rental

I don't believe there is a limitation unless there is personal use of one of the rental spaces.

Pub 527 has some examples of rentals of part of your home where you rent the portion at a Fair Rental Value but then have, say, a sister stay in the room for awhile. If it's greater than the 15 day/10% vacation home rule, then you have personal use of the rental property.

The same rules apply if you rent below Fair Rental Value to a related party. It is considered personal use and your ability to take a loss is restricted.

If it's treated as a FMV rental, though, I believe it's treated on sched E as such, with losses allowed according to the Passive activity rules.

[DMICPA]

Rental Condo-Related party one out of three

Client bought a three bedroom condo. Rents out all 3 rooms. Two are unrelated parties at $475 each. Son is third party and pays $450.

It seems to me from my reading of various posts that since the son is assumed to be the onsite manager and will see to it that the property is well taken care of that the minimal $25 a month difference would not be a problem here.

So can I deduct the rental expenses and other normal things on this rental? Including depreciation, Homeowners dues, utilities?

There should be no proration because of the related party? It would be pretty close in any event.

Just wondering.

Bob

[taxea]

expenses are usually allocated by percentage of rented sqft divided by total livingspace sqft. This should work for you especially in the event that each space is not of equal size. You shouldn't divide by the number of renters and owners because that would not be as accurate and could mean that the tenants are paying for portions of areas expenses that they truly don't use.

[appelman]

I'm inclined to agree with Gretel.

These are not independent living units, so I think vacation home rules would kick in, and a loss would not be allowed, although it can be carried forward.

[Burke]

Have the same situation, sort of, where client rents out BR's in his private home through an on-line Bed & Breakfast outfit. Renters would have run of the common areas. Assume same rules would apply? There would be some meals provided in this case.

[Kram BergGold]

What I leanred recently

At a conference this fall, the speaker said, in a roomate situation, treat the deductions the same way you would do a home office. This is the first idea that has ever made sense to me.

[DMICPA]

Rental Allocation?

What I have been reading in these posts does not make sense, at least in the situation I described.

Condo. Three tenants are renting it. Two are unrelated to the owner. The third tenant is an adult and the son of the owners of the condo that live in another city.

This is not a vacation home, it is a rental. This is not a home office situation, it is a rental with three tenants, one of whom is related to the owners. The son pays almost as much as the other two renters. The unrelated renters pay $475 per month each and the son pays $450.00, a difference of only $25.00 per month.

Just because one of the tenants is the son and pays almost the same rent as the others, why would this be considered a "vacation home".

The son being there happens to manage the property, see that repairs are done, collects rent etc.

I would think that this a straight rental.

Bob

[Snaggletooth]

Several Wrong Turns

Bob, I agree. Several errors have been made in the foregoing posts. Not that I am above making errors myself, but I hope no one is depending on this thread for guidance.

Firstly, "common area" most likely does not imply that the owner has use. It is most likely "common" to the four tenants to share - possibly shower, reception, lounge, etc.

Secondly, office-in-home is totally incongruous. Requirements are different, treatment is different.

Thirdly, losses ARE deductible, subject to rules of "active participation."

Fourthly, nothing in the original post says anything about this being a condo or time-share, and those rules should not be invoked.

Also, it should be noted that the original post was started over six years ago. Schedule E has been starkly redesigned at least once since then, and we have been made aware of rental income falling into numerous different categories.

[DMICPA]

Thanks for the insight

Dear Snaggletooth: Thank you for your insight. I am figuring to treat it as a straight rental subject to the passive loss rules.

Merry Christmas and Happy Holidays.

[taxea]

These are not independent living units, so I think vacation home rules would kick in, and a loss would not be allowed, although it can be carried forward.

I disagree. It does not have to be individual "buildings"....the rental is allocated by the sqft as I explained above.

The portion that would not be considered a rental, in my opinion, is the son's room because he is not paying fmv...

[taxea]

Have the same situation, sort of, where client rents out BR's in his private home through an on-line Bed & Breakfast outfit. Renters would have run of the common areas. Assume same rules would apply? There would be some meals provided in this case.

not if the B&B provides services....food service, room cleaning, etc. In this case it would be a Sch C not a Sch E and the expenses would be allocated by the sqft calculation I posted earlier. Repair, maint., cleaning would be expensed only if done in the "rented areas".

[Lion]

I would say the $25 difference for a relative who should be expected to treat the property better than a stranger, and also since he's collecting rents and overseeing repairs, actually IS FM rent.

As long as each roomer has the run of the place, the expenses including depreciation of the whole place are deductible. Really no difference than if one person or family rented the single family dwelling.

Now if one room at a time is unavailable for rent during a renovation or whatever, then having the three "parts" of the house as three lines on the depreciation schedule by square footage, and dividing expenses into three parts by the square footage now will save splitting it up later when that back bedroom leaks and you can't rent to a third guy for a few months until you repair. But, it's still going to add up to the whole house.