Renting a room in my home


G

G Burton

I would like to rent a room in my home.

1) Since we would have to share some facilities (kitchen
bathroom, etc.), what would we do about the "exclusive use"
rule?

2) Suppose I deduct home depreciation, and I later wind up
selling the home and upgrading to a larger home. I would
probably continue to rent out a room in the larger home.
What consequences (if any) would there be to taking the
depreciation?
 
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J

JoeCOliveira

I would like to rent a room in my home.

1) Since we would have to share some facilities (kitchen
bathroom, etc.), what would we do about the "exclusive use"
rule?

2) Suppose I deduct home depreciation, and I later wind up
selling the home and upgrading to a larger home. I would
probably continue to rent out a room in the larger home.
What consequences (if any) would there be to taking the
depreciation?
1) you would exclude a portion of those expenses from your schedule
E. (I say 50% is a fair estimate if you are single and the other
person is single) Question: Who will pay the utilities, trash
removal, taxes, any other expense associated with the house? If you
are paying the expenses, allocate the expense accordingly. If you are
having the new person pay their share, no deduction.

2) Depends on how you look at consequenses!! You do have $250,000
($500,000 if married) exclusion of gain on the sale of your home if
you meet the residence tests. You would have to recapture the gain on
the depreciation. For example, you bought your home for $300,000 and
you have depreciation of $10,000. You have taken $10,000 of expense
against ordinary income on Sch. E. Now you sell the home. Your home
sells for $500,000. The gain on the sale of your home is $200,000.
You must recognize $10,000 as gain on Form 4797 and taxed at a 25% tax
rate (Sec. 1250).
The remaining $190,000 is tax free.
 
G

G Burton

That's an excellent answer to part 2, but I don't think I was clear
enough on part 1.

What I was thinking about with part 1 was a deduction amounting to a
percentage of my mortgage payment. If I were using a single room for an
office, the exclusive use rule would only allow me to deduct the portion of
my mortgage that represents the square footage of that room because only
that one room is used exclusively for business. In the case of a renter,
however, the renter (who happens to be my mother) will require use of a
shared bathroom and shared kitchen. She will actually have access to the
entire house, so it might be arguable that I could deduct 1/3 of my mortgage
based upon the fact that there are 3 people using the home. I am expecting
to deduct 1/3 of my utilities, cable TV, etc.

This must be a common question, but I haven't been able to find it in
the standard IRS literature. Although I have run a home business before,
I'm not a tax expert -- as I'm sure you have guessed by now. Can you point
me to a good reference?

Thanks!!
 
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G

G Burton

That's an excellent answer to part 2, and possible also to part 1, but
please indulge me with a little more clarification.

What I was thinking about with part 1 was what is fair to use to compute
the percent business use. If I were using a single room for an office, the
exclusive use rule would only allow me to deduct the portion of my expenses
that represents the square footage of that room because only that one room
is used exclusively for business. In the case of a renter, however, the
renter (who happens to be my mother) will require use of a shared bathroom
and shared kitchen. She will actually have access to the entire house, so
it might be arguable that I could deduct 1/3 of my mortgage interest and all
utilities based upon the fact that there are 3 people using the home. I was
expecting to deduct 1/3 of my utilities anyway, but I am uncertain about
mortgage interest, cable TV, etc.

This must be a common question, but I haven't been able to find it in
the standard IRS literature. Although I have run a home business before,
I'm not a tax expert -- as I'm sure you have guessed by now. Can you point
me to a good reference?

Thanks!!
 

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