Taxable Rental Income From Primary Residence

6 Replies

BP, 

I live in Utah and wanted to get some opinions and insight for the below inquiry  I will have to include rental income from my spare room in my primary residence. I want to know how this will look on my income return and what I can deduct/expense against the rent.

For 2014 I have the taxable “Net Income”  from the rent calculated by the following:

67% of my primary residence is used/shared by tenant.

Total rent proceeds - 67% of monthly expenses - 67% of total rehab costs = total Net Income

Is this the correct way to report the rent proceeds from a spare room in my primary residence?

Can I deduct the appropriate % of sq feet shared of expenses associated with my primary residence (HOA, utilities, Comcast, etc…)?

Can I deduct the appropriate % of sg feet shared of all rehab costs that were spent in 2014 (new floors and paint)

Thanks,

Bryce  

Sounds right @Bryce Till  but I think it would be wise to consult a tax accountant prior to finalizing your tax return. A lot of times your initial consult is at no cost and you could ask them your questions and get some professional advice.

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@Bryce Till  

The two most common ways to figure the division of expenses when renting a room in your primary residence is to divide the rented sq. ft. of the rented room by total square feet or divide occupied bedrooms by total bedrooms. 

You can fully deduct any expense incurred just for the room you rent, such as repairing a window in the room or installing carpets in the room or painting the room. If you incur additional insurance expenses due to renting the room, you may deduct the difference as an operating expense. If you install a second phone line or a second cable box for the tenant's use, you may deduct the expense, but you may not deduct the expense of the original. 

Expenses for your entire home are divided between the rented part and the part you live in. These expenses include mortgage interest, repairs for your entire home, improvements for your entire home, homeowners insurance, utilities (electricity, gas, trash removal), etc.

Hope this helped.

@Brandon Hall  what about the sq ft of shared space? Such as one kitchen and living room that is shared between s owner and tenant? Can that % be included in deducting expenses/rehab costs? 

Keep in mind the tenant is actively paying for and using that space.

@Bryce Till  

Generally, you can only deduct the space being rented. So if he/she is renting a room that is 500 sqft while your room and the common areas total 1,500 sqft, then you can expense 25% of the costs (500/2,000).

It's usually more beneficial to determine the division of expenses based on the number of rooms in your house. Take the example above and say that there are only two bedrooms in your house, you can say one bedroom is being rented which constitutes 50% of the house. So now you can deduct 50% of expenses rather than 25%. 

I assume with 67% you have 2 roommates in the house.  One thing to consider is the bedroom size, if they have significantly smaller bedrooms you may have to reduce their share of household expenses - it shouldn't be terribly far off since they would have 67% use of common areas.  If utilities are included in the rent, a pro-rated amount can be deducted.

Floors will likely be a capital improvement and have to be deducted.  Painting can probably be treated as a repair.  I would run the major items by the CPA.

Make sure you factor pro-rated interest, taxes and depreciation into your expenses.  For depreciation, you can only depreciate the building(not the land).  You can not deduct the principal portion of your mortgage payment.  This will reduce your personal deduction, but it may mean you are better off with the standard deduction on your personal taxes.