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Tax, SDIRAs & Cost Segregation

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Mandeep S.
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Lack of clarity with regards to house hacking taxes/depreciation

Mandeep S.
Posted Feb 24 2024, 19:47

Hi,

It seems this is hotly debated on the internet.

If I have a single family home and rent rooms out, are proportions of common areas allowable in calculation of depreciation and expenses?

For example,

Let's say there's a 1000 sq foot house with two bedrooms - one for the tenant and one for the landlord.

100 sq foot is for landlord exclusive use.

100 sq foot is for tenant exclusive use.

800 sq foot is common areas (kitchen, living room, dining room, etc).

Is the business use 50% (100 + 400 [common area divided into 2]/1000) or 10% (100/1000)?

Most seem to say it would be 10%. "Only the exclusively used areas are considered rental areas. The common area is available to all and is not a factor in the allocation of expenses."

Others say it would be included. "If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. You can use any reasonable method for dividing the expense."

It seems IRS Publication 527 (2023), Residential Rental Property would say it's 10% based on their example. Or maybe they oversimplified it, for sake of example?

"Example. You rent a room in your house. The room is 12 × 15 feet, or 180 square feet. Your entire house has 1,800 square feet of floor space. You can deduct as a rental expense 10% of any expense that must be divided between rental use and personal use. If your heating bill for the year for the entire house was $600, $60 ($600 × 10% (0.10)) is a rental expense. The balance, $540, is a personal expense that you can’t deduct."

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Joshua Davidson
Tax & Financial Services
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  • Accountant
  • Morgantown, WV
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Joshua Davidson
Tax & Financial Services
Pro Member
  • Accountant
  • Morgantown, WV
Replied Mar 3 2024, 08:07

Hi Mandeep,

The 100 sq. ft. of exclusive landlord space could be utilized in a Business Use of Home deduction on your personal tax return, accounting for 10% of your home expenses. Under IRS Publication 587, you can depreciate this 10% portion of your home over 39 years using the straight-line method.

The 100 sq. ft. of exclusive tenant use could be utilized as rental property expenses, accounting for another 10% of your expenses, which would be shown on Schedule E of your tax return. Under IRS Publication 527, you can depreciate this 10% portion of your home over 27.5 years using the straight-line method.

I am a Certified Public Accountant and I offer bookkeeping and tax services related to real estate. Please let me know if I can be of assistance to you!

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