House Hacking - Can only deduct rented bedroom square footage?

St. Paul, Minnesota
Tax, SDIRAs & Cost Segregation
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House Hacking - Can only deduct rented bedroom square footage?

Zach Adams
Member since 2020 · 20 posts · 7 votes

Hi All, I have a house hack which is a duplex. I rent out the lower unit and for the upper unit, I rent 1 of 2 bedrooms. I was told that I could only depreciate 8.6% (square footage percent of the upper unit) and only deduct repairs done to the rented room alone. Is this correct? I was under the understanding that I could do a room ratio and deduct 50% of the upper unit expenses. If I am correct, does anyone know where this is in the IRS code allows this? Thanks. 

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
2y
Quote from @Zach Adams:

Hi All, I have a house hack which is a duplex. I rent out the lower unit and for the upper unit, I rent 1 of 2 bedrooms. I was told that I could only depreciate 8.6% (square footage percent of the upper unit) and only deduct repairs done to the rented room alone. Is this correct? I was under the understanding that I could do a room ratio and deduct 50% of the upper unit expenses. If I am correct, does anyone know where this is in the IRS code allows this? Thanks. 

I wouldn't recommend that you DIY this. It's more complex than what you expect. You focus on one relatively minor issue while missing the bigger picture.

You have two properties, not one, for tax purposes. Your lower unit is a conventional rental. You have to allocate expenses between the two units, probably close to 50/50, and that includes depreciation. And you can claim the resulting loss if any.

Your upper unit however works completely differently, and you cannot claim any loss on your upper unit. At best, you can erase the rental income from this unit, but not go below zero. % of allocation is a separate technicality, and my colleagues already commented on it. 

Finally, some shared expenses related to the entire house such as landscaping have their own complexities.
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  • David Orr
    Accountant · Austin, TX · Member since 2016 · 72 posts · 72 votes
    2y

    Unfortunately, common spaces that you use as part of your personal space can't be included in the rental portion calculations.  Code section 280A defines personal use of a real estate property, and it doesn't allow deduction of expenses for personal use space because it's considered to be your residence rather than rental property.  In other words, if you have use of the space, it isn't considered rental space (even when it's also shared by a renter).  

    Treasury Regulations section 1.280A-2(i)(3) suggests a couple ways you can proportion the rental portion of a property, including using square footage (which is most common).  It does also say that you can use the number of rooms as an alternative way to divide it up, but only if the rooms are approximately the same size.  And note they didn't say bedrooms, they said rooms.  So if you have two bedrooms and a common space, and all 3 of those spaces are about the same size, that's 3 rooms, so the exclusively-for-renter-use room would be 1/3.   Not 1/2.  Unfortunately.  

    I know it is logical to think you could deduct half of the shared common space, but unfortunately the tax law wasn't written to allow that.  

    David Orr
    Tax Modern

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  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    2y

    @Zach Adams

    Tax benefits, such as depreciation and deductions for costs associated with rental halves of the property, are available to duplex owners through house hacking. A portion of the upper unit's total square footage is depreciated through depreciation, which is calculated by dividing the unit's total square footage by the ratio of rented space. There is a 50% deduction for one bedroom in the top unit. Deductions are depending on the percentage of the property that is rented out.

    To precisely compute deductions and guarantee conformity with IRS regulations, it is essential to maintain thorough records of rental income and expenditures.

    In order to make sure you're optimizing your tax advantages and adhering to all applicable requirements, even while I can offer broad advise, I suggest speaking with a tax professional or accountant who is knowledgeable with real estate taxation. They can guide you through any complexity in the tax legislation and offer tailored guidance depending on your particular circumstances.

    Good luck!

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    2y
    Quote from @Zach Adams:

    Hi All, I have a house hack which is a duplex. I rent out the lower unit and for the upper unit, I rent 1 of 2 bedrooms. I was told that I could only depreciate 8.6% (square footage percent of the upper unit) and only deduct repairs done to the rented room alone. Is this correct? I was under the understanding that I could do a room ratio and deduct 50% of the upper unit expenses. If I am correct, does anyone know where this is in the IRS code allows this? Thanks. 

    I wouldn't recommend that you DIY this. It's more complex than what you expect. You focus on one relatively minor issue while missing the bigger picture.

    You have two properties, not one, for tax purposes. Your lower unit is a conventional rental. You have to allocate expenses between the two units, probably close to 50/50, and that includes depreciation. And you can claim the resulting loss if any.

    Your upper unit however works completely differently, and you cannot claim any loss on your upper unit. At best, you can erase the rental income from this unit, but not go below zero. % of allocation is a separate technicality, and my colleagues already commented on it. 

    Finally, some shared expenses related to the entire house such as landscaping have their own complexities.
    1Reply
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