I have a house that I reside in, but I also rent out several rooms. The income I receive from the renters is more than enough to make the mortgage payment. My question is: how do I claim the property on my taxes?
Thanks for any help.
Brian

You will need to fill out a Schedule E to file with your Form 1040. On the Schedule E you will report the income and expenses related to your rental activity.

A portion of your mortgage interest and property taxes should be allocated to your Schedule E. The remainder of these expenses would be reported on your Schedule A. I would suggest that you use the relative square footage of the space rented to your friends as the basis for the allocation. You should also determine the portion of the expenses to be allocated based on the number of months your friends were tenants.

Any other expenses you incurred as a direct result of your rental activity will also be deductible.

You should take your basis in your home (cost + improvements) and depreciate the portion of home allocable to rental activities over 27.5 years.

The following is a link to PUB. 527 Residential Rental Property on the IRS's website.

http://www.irs.gov/forms_pubs/pubs/p527toc.htm

If you want to download the PDF version of the publication and print it out use this link.

http://www.irs.gov/forms_pubs/pubs.html

Hey Taxees,

Good info, Taxslave, and thanks for the link to IRS Pubs. I am working on some of the same issues.

Re depreciation:
Pub 527 tells me to use the lesser of cost basis+improvements or FMV at the time I put my love-shack into rental service. Does an assessment notice from my county tax assessor count to fmv? I personally think I may have been able to get a better price at the time, but did not think to pay for an evaluation when I began renting a couple of rooms while I was out of the country.

Also, if I have part of the place (2 of 4 br's) rented out, is 50% of expenses about right? Renters had access to common areas: kitchen, garage, laundry, living room. Additionally, I was gone a good percentage of the time, but what I was charging per room would not have been fmv for the whole house.

Any thoughts on the matter greatly appreciated!

Cheers,
EZ

Pub 527 tells me to use the lesser of cost basis+improvements or FMV at the time I put my love-shack into rental service. Does an assessment notice from my county tax assessor count to fmv? I personally think I may have been able to get a better price at the time, but did not think to pay for an evaluation when I began renting a couple of rooms while I was out of the country.

Tax assessments are usually lousy places to get FMV information for a property. A talk with a realtor might give better info for the recent values.

Also, if I have part of the place (2 of 4 br's) rented out, is 50% of expenses about right? Renters had access to common areas: kitchen, garage, laundry, living room. Additionally, I was gone a good percentage of the time, but what I was charging per room would not have been fmv for the whole house.

Sounds like a reasonable basis for considering costs. You need the FMV of the house for depreciation purposes. Your depreciable basis is the lesser of your cost basis or the FMV on the date you began renting the rooms.

--Peter

You would only use the FMV as your taxable basis in this situation where the FMV was LESS THAN your adjusted cost basis.

As a side note, it is very important that you closely track your depreciation deductions as this will affect your basis and the recognition of income at the time you sell your house.

taxslave wrote:
<You would only use the FMV as your taxable basis in this situation where the FMV was LESS THAN your adjusted cost basis.
As a side note, it is very important that you closely track your depreciation...>

Thanks again. I think I am all set on this now. I didn't compute any of this the first year I rented out a room or two, and am trying now to play catch-up, AND make sure I get it right! Turns out my guestimate of fmv and my no-kidding adjusted basis of the property minus land are within 50 bucks of each other.

Having the boards to poke around in has definitely helped my read of the actual IRS Pubs.
Cheers,
ez

As a side note, it is very important that you closely track your depreciation deductions as this will affect your basis and the recognition of income at the time you sell your house.

I need to run several scenarios (sell my house in 6 months, 5 years, never, etc.) to figure out whether I should deduct depreciation from a "Mother-In-Law" basement apartment that I rent out.

How do I figure out the basis and recognition of income when I sell my house?

I read pub 527, but it didn't tell me anything about selling the house. It does turn out that the IRS owes ME this year if I do depreciate the rental unit.

hardy

hardy writes (in part):

I need to run several scenarios (sell my house in 6 months, 5 years, never, etc.) to figure out whether I should deduct depreciation from a "Mother-In-Law" basement apartment that I rent out.

I reply:

No, you don't. Deduct the depreciation. You will be required to recapture all depreciation "allowed or allowable" when you finally sell, whether you actually claimed it or not, so you might as well get the benefit of the deduction. --Bob