Renting out rooms in soon to be purchased house

5 Replies

I plan to purchase I new home within the next month and was planning on renting out 1-3 rooms to future friends/tenants. I’ve done a little research regarding tax deductions for the portion I am renting out but was looking for more advise for precisely calculating how much of the house I can offset with depreciation for tax purposes. I was thinking that I could depreciate whatever percentage of the home was occupied by the number of renters (ex. Myself + one additional renter= depreciate 50% of home value) as they will have equal access to kitchen, living room, etc. I was also going to cover utilities as part of their rental expenses and deduct part of the utilities as well in addition to supplying furniture for their rooma which I would also depreciate. My question is what kind of documentation do I need to keep track of to avoid IRS trouble and are there other tax deductions that I could take advantage of? Any and all advise would be welcomed. Thank you in advance!

@Erik Karpinski , Congrats on this. 

Depreciation: 

1) You cannot depreciate the portion of the house that you occupy/use. ( your room, kitchen, living room). These are common area that have personal use as well. The court have said that expenses allocable to the common areas are not deductible (Anderson).

2) You will have to find a reasonable way to depreciate based on # of room, or square footage of room that is rented. 

3)Yes, utilities and those kind of other expenses can be allocated to rental activity based on the allocation percentage. I would use same depreciation percentage as expense allocation percentages. 

4)  The expenses related to just the rented portion are 100% deductible. ( e.g- replacing  the carpet in the rented room) 

Just like every other expenses, keep the receipts and show how you came up with the allocation. This is what I Use. It is very comprehensive with actual depreciation and interest expense. It has multiple tabs, I am just sharing one. there is a section where you can use allocation method based on room or SQ footage. 

@Ashish Acharya Damn. Was hoping I would be able to deduct a little bit more since the tenants will be using all common areas. Do I have to use that same percentage when it comes to deducting mortgage interest, homeowner’s insurance, and HOA fees as well? I’m guessing that means I also won’t be able to deduct a percentage of the appliances (refrigerator, oven, etc.) since they are also in “common area” and will be shared?

@Erik Karpinski

Homestead exemption is state specific but it applies to owner occupied primary residence in FL. I’m not sure what state you are in. You get a little more if you are over 65 in addition to what is available to all. Biggest help to me is minimizing property tax increases and asset protection. 

Great documentation  from @Ashish Acharya

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