What percentage of house to assign rental

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baseball2horse
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What percentage of house to assign rental

Post by baseball2horse » Thu Mar 14, 2019 10:34 am

Hello, I am currently renting a out a room in my house and I am trying to figure out the "best" way to determine what percentage of my house is being used as a rental. The IRA states that "any reasonable method" can be used to determine this. But "reasonable methods can result in wildly differing amounts. Everything from 1/2, as their two people in the house all the way down to 1/20 using square footage of room/total square footage (counting the basement). With plenty of options in between (dividing by above ground square footage, including the bathroom primarily used by him in the square footage, using the number of rooms (which can vary depending on how you count a room))

A higher percentage results in more being able to be deducted in taxes this year while a lower percentage will result in less depreciation recapture taxes being owed when I eventually sell it. (I am itemizing so the percentage really only effects the depreciation deduction as things like mortgage interest and property taxes essentially just move with a net effect of zero.)

As I am still early in my career I anticipate being in a higher tax bracket when i sell, which would make using a lower percentage more advantageous. (as depreciation taxes come out of ordinary income taxes.) But on the other hand I don't want to give up a guaranteed tax break now.

I was just wondering if anyone who has any experience with rentals has any insight on how to make that decision. Or if anyone has anything else that they think should be taken into consideration.

bloom2708
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Re: What percentage of house to assign rental

Post by bloom2708 » Thu Mar 14, 2019 2:40 pm

As stated, the key is to be consistent and be able to show your calculation.

Let's say you have a 3 bedroom house with 2 bathrooms and a shared living room and kitchen. 1 owner, 1 occupant/renter.

1/3 of the bedrooms, 1/2 of the bathrooms, 1/2 of the living room and kitchen. If you have 1 garage stall and you use it, then that is 0%.

You are kind of building a model. .333 + .5 + .5 + 0 divided by 4 = 1.333/4 = .3325

I think you could justify 33% to 35%. Which seems reasonable for a renter. The owner is likely using more of the storage/garage/basement, etc.

I don't think there is "wrong" if you lay it out and can explain/support the number.
"We are not here to agree with you; we are here to provoke thoughtfulness..." Unknown Boglehead

JGoneRiding
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Re: What percentage of house to assign rental

Post by JGoneRiding » Thu Mar 14, 2019 2:53 pm

You will pay the deduction back NO MATTER WHAT sounless your income is really high now and you are likely to be a lot lower some other time and given that taxes are likely to go up and that there is a capital gains exclusion for as much as you can get under that. I personally would use the method that creates the minimalist current depreciation.

I say this as someone dealing with recapture for the next several years.

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dm200
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Re: What percentage of house to assign rental

Post by dm200 » Thu Mar 14, 2019 2:57 pm

baseball2horse wrote:
Thu Mar 14, 2019 10:34 am
Hello, I am currently renting a out a room in my house and I am trying to figure out the "best" way to determine what percentage of my house is being used as a rental. The IRA states that "any reasonable method" can be used to determine this. But "reasonable methods can result in wildly differing amounts. Everything from 1/2, as their two people in the house all the way down to 1/20 using square footage of room/total square footage (counting the basement). With plenty of options in between (dividing by above ground square footage, including the bathroom primarily used by him in the square footage, using the number of rooms (which can vary depending on how you count a room))

A higher percentage results in more being able to be deducted in taxes this year while a lower percentage will result in less depreciation recapture taxes being owed when I eventually sell it. (I am itemizing so the percentage really only effects the depreciation deduction as things like mortgage interest and property taxes essentially just move with a net effect of zero.)

As I am still early in my career I anticipate being in a higher tax bracket when i sell, which would make using a lower percentage more advantageous. (as depreciation taxes come out of ordinary income taxes.) But on the other hand I don't want to give up a guaranteed tax break now.

I was just wondering if anyone who has any experience with rentals has any insight on how to make that decision. Or if anyone has anything else that they think should be taken into consideration.
No expert, but years ago - I shared a house with the owner (friend of mine) along with several others. I think it better to term the relationship as "sharing the house" vs renting a room.

Maybe (depending on the facts and details) it could ne justified to treat the house as 1/2 residence and 1/2 rental.

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baseball2horse
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Re: What percentage of house to assign rental

Post by baseball2horse » Thu Mar 14, 2019 4:12 pm

dm200 wrote:
Thu Mar 14, 2019 2:57 pm

No expert, but years ago - I shared a house with the owner (friend of mine) along with several others. I think it better to term the relationship as "sharing the house" vs renting a room.
I have certainly thought about just calling it sharing the house and not dealing with it all, but my roommate is a friend of an acquaintance and while we are friendly now, we did not know each other at all beforehand, so i feel like I would be hard-pressed to defend that claim. But it is certainly a consideration.
dm200 wrote:
Thu Mar 14, 2019 2:57 pm
Maybe (depending on the facts and details) it could ne justified to treat the house as 1/2 residence and 1/2 rental.
I don't particularly want to call it half a rental as then my rental deductions will be higher than my rental income. And you cannot use passive deductions to offset ordinary income. And while I believe its possible to carry-forward such a loss, I am first off confused by doing so and when you can then realize the loss, and second my understanding is that if you carry forward a loss for too many years your rental gets declared not-for-profit and then it limits the amount you can deduct. So i think I would rather not deal with all that complication if I can avoid it by simply using a different "reasonable method"

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baseball2horse
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Re: What percentage of house to assign rental

Post by baseball2horse » Thu Mar 14, 2019 4:42 pm

JGoneRiding wrote:
Thu Mar 14, 2019 2:53 pm
You will pay the deduction back NO MATTER WHAT sounless your income is really high now and you are likely to be a lot lower some other time and given that taxes are likely to go up and that there is a capital gains exclusion for as much as you can get under that. I personally would use the method that creates the minimalist current depreciation.

I say this as someone dealing with recapture for the next several years.
That was my initially thought as well. Especially because I am currently in the 22% tax bracket and recapture is 25% (or capped at 25%? and otherwise ordinary income rates? i have found very little on this). But then my income will hopefully be higher later and then if rates also go up then i will be at higher tax bracket and that 25% tax will be a net savings, but since I've been using a lower percentage assigned to rental I won't be able to thus get much net benefit from it. It also raises my current taxes which is a sure things verses speculating on what might be the case in the future

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baseball2horse
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Re: What percentage of house to assign rental

Post by baseball2horse » Thu Mar 14, 2019 4:47 pm

bloom2708 wrote:
Thu Mar 14, 2019 2:40 pm
As stated, the key is to be consistent and be able to show your calculation.

Let's say you have a 3 bedroom house with 2 bathrooms and a shared living room and kitchen. 1 owner, 1 occupant/renter.

1/3 of the bedrooms, 1/2 of the bathrooms, 1/2 of the living room and kitchen. If you have 1 garage stall and you use it, then that is 0%.

You are kind of building a model. .333 + .5 + .5 + 0 divided by 4 = 1.333/4 = .3325

I think you could justify 33% to 35%. Which seems reasonable for a renter. The owner is likely using more of the storage/garage/basement, etc.

I don't think there is "wrong" if you lay it out and can explain/support the number.
That certainly is quite the reasonable method.

I suppose I should have mentioned that I am more or less trying to find a model that results in a small enough rental portion that I don't end up carrying a loss. Mostly because the rental rules on carrying a loss forward and then the for-profit vs not for profit rental confuse me tremendously and I'd love to not have to figure it out.

I suppose to some extent I've been trying to determine a reasonable method that results in close to zero tax owed but not a loss, but that feels fairly weaselly, hence the seeking other opinions. So thank you for offering your reasonable method

Saving$
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Re: What percentage of house to assign rental

Post by Saving$ » Thu Mar 14, 2019 10:31 pm

If you have a rental loss, you can deduct it. You are actively participating in the rental business and are at risk.

HOWEVER,
- if your current tax rate is 22%, your tax decrease will be the depreciation * 22%
- if recapture remains at 25%, regardless of your own future tax rate, you will pay back the depreciation at depreciation * 25%
You only come out ahead if the additional deductions for expenses such as utilities, home maintenance, etc exceed [annual depreciation] * 3%,

If not, figure out if the renter's payment can reasonably be applied to cover the average utilities + portion of x (yard maintenance, etc) so that it is expense sharing and you can be done with it and simplify things.

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dm200
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Re: What percentage of house to assign rental

Post by dm200 » Fri Mar 15, 2019 8:43 am

Saving$ wrote:
Thu Mar 14, 2019 10:31 pm
If you have a rental loss, you can deduct it. You are actively participating in the rental business and are at risk.

HOWEVER,
- if your current tax rate is 22%, your tax decrease will be the depreciation * 22%
- if recapture remains at 25%, regardless of your own future tax rate, you will pay back the depreciation at depreciation * 25%
You only come out ahead if the additional deductions for expenses such as utilities, home maintenance, etc exceed [annual depreciation] * 3%,

If not, figure out if the renter's payment can reasonably be applied to cover the average utilities + portion of x (yard maintenance, etc) so that it is expense sharing and you can be done with it and simplify things.
That is my understanding as well (no tax expert, though).

By treating a fraction (in this case 1/2) as rental - then I believe you can treat that fraction (in this case 1/2) of just about all expenses of the house as rental expenses. This could include furniture, furnishings, improvements, etc. You want a fancy pool table? Get it and treat it as 1/2 rental and expense or depreciate. ... and so on.

JGoneRiding
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Re: What percentage of house to assign rental

Post by JGoneRiding » Fri Mar 15, 2019 3:08 pm

Passive rental losses are limited by income. But i believe you can carry then fwd indefinitely (unless you die)

Saving$
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Re: What percentage of house to assign rental

Post by Saving$ » Fri Mar 15, 2019 10:30 pm

Can a tax expert weigh in here?

Is renting part of your home considered a "passive" rental activity?
Is renting another home you own considered a "passive" rental activity?

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dm200
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Re: What percentage of house to assign rental

Post by dm200 » Sat Mar 16, 2019 11:32 am

Saving$ wrote:
Fri Mar 15, 2019 10:30 pm
Can a tax expert weigh in here?

Is renting part of your home considered a "passive" rental activity?
Is renting another home you own considered a "passive" rental activity?
No tax expert - but my understanding is that renting part of your home is identical (from a tax perspective) to having a separate rental home.

So, for example if "John" purchases a $600,000 house and rents/shares half of the house - that would be the same as him buying a $300,000 house and renting it.

Thesaints
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Re: What percentage of house to assign rental

Post by Thesaints » Sat Mar 16, 2019 11:44 am

The method you use has to be consistent through time, well documented, and above all able to convince the IRS auditor.
The latter is the most important property; in fact it absolutely trumps the other two.

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dm200
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Re: What percentage of house to assign rental

Post by dm200 » Sat Mar 16, 2019 11:51 am

Thesaints wrote:
Sat Mar 16, 2019 11:44 am
The method you use has to be consistent through time, well documented, and above all able to convince the IRS auditor.
The latter is the most important property; in fact it absolutely trumps the other two.
Yes - I agree 100%

Saving$
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Re: What percentage of house to assign rental

Post by Saving$ » Sat Mar 16, 2019 2:32 pm

dm200 wrote:
Sat Mar 16, 2019 11:32 am
Saving$ wrote:
Fri Mar 15, 2019 10:30 pm
Can a tax expert weigh in here?

Is renting part of your home considered a "passive" rental activity?
Is renting another home you own considered a "passive" rental activity?
No tax expert - but my understanding is that renting part of your home is identical (from a tax perspective) to having a separate rental home.

So, for example if "John" purchases a $600,000 house and rents/shares half of the house - that would be the same as him buying a $300,000 house and renting it.
Concur entirely. That was the point I was trying to make. Having a $300k rental home is NOT considered a passive activity and you can write off the losses on your taxes...unless your income is so high that you are limited to the amount of losses.

JGoneRiding
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Re: What percentage of house to assign rental

Post by JGoneRiding » Sat Mar 16, 2019 9:01 pm

Saving$ wrote:
Sat Mar 16, 2019 2:32 pm
dm200 wrote:
Sat Mar 16, 2019 11:32 am
Saving$ wrote:
Fri Mar 15, 2019 10:30 pm
Can a tax expert weigh in here?

Is renting part of your home considered a "passive" rental activity?
Is renting another home you own considered a "passive" rental activity?
No tax expert - but my understanding is that renting part of your home is identical (from a tax perspective) to having a separate rental home.

So, for example if "John" purchases a $600,000 house and rents/shares half of the house - that would be the same as him buying a $300,000 house and renting it.
Concur entirely. That was the point I was trying to make. Having a $300k rental home is NOT considered a passive activity and you can write off the losses on your taxes...unless your income is so high that you are limited to the amount of losses.
By passive I meant it's not earned income. The limit for MFJ is 150k. OP is single and in the 22% bracket. I do not know what that limit is but I imagine is close to it.

OP. If I had a choice I would depreciate the least amount I could reasonably expect the IRS to accept. In your case it sounds like you could argue a very small amount of the house via using sq footage. Of course now that it is harder to itemize it might make sense to argue for a larger percentage in order to include more of the property taxes and utilities. I believe these all have to be split via the same method.

Choose wisely the IRS hates to see you change it!

Edit: so looked up. The losses themselves are "passive" losses that you must "actively " participate in in order to claim up to 25k. (I still do not know the limit for single as I am unwilling to read the IRS pub for the op)

ralph124cf
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Re: What percentage of house to assign rental

Post by ralph124cf » Sun Mar 17, 2019 12:00 am

I have not read the current IRS rules on rental losses, but the rules USED to be: If your income was up to (MFJ) $100K, you could deduct up to $25K of losses in excess of rental income against ordinary income, going down 1 for 2 until at $150K no deduction was allowed in excess of rental income.

I do not know what the current rules are.

Ralph

BoomXer
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Re: What percentage of house to assign rental

Post by BoomXer » Sun Mar 17, 2019 12:33 am

ralph124cf wrote:
Sun Mar 17, 2019 12:00 am
I have not read the current IRS rules on rental losses, but the rules USED to be: If your income was up to (MFJ) $100K, you could deduct up to $25K of losses in excess of rental income against ordinary income, going down 1 for 2 until at $150K no deduction was allowed in excess of rental income.

I do not know what the current rules are.

Ralph
The rules remain the same under the new tax law. If you have disallowed losses they are carried forward until you income drops below $150k or you sell the property where they will be used to offset the recapture/gain.

By IRS definition rental income is "passive" but for residential rentals there is an exception to the passive loss limitation up to $25k pre year as long as you are "actively" engaged in the rental activity as Saving$ points out.

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