Author Topic: Basement apartment rental: basic tax deduction question  (Read 3748 times)

Disco Biscuit

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Basement apartment rental: basic tax deduction question
« on: December 02, 2016, 09:11:55 AM »
This is hopefully a simple problem for someone out there to help me with (apologies if there's another thread on this; the search function never works properly for me).

I bought my house last year in December, so 2016 is the first year I'll be including real estate items on my tax filing forms. I have a basement apartment that I rent to my brother.

As I understand it, I'll need to claim rental income AFTER deductions. However, the deductions are where I'm confused. According to what I've found online, I can pro-rate my mortgage interest, home insurance and property taxes (based on # of bedrooms or sq footage) to reduce the amount of rental income I claim on my taxes. Yet...this doesn't really seem to help, because that pro-rated amount will simply be subtracted from the amount of taxes/interest/insurance I claim to reduce my taxable income from my 9-5 job, right? Seems like a net 0 move. Let me give an example to illustrate my understanding, and hopefully someone can confirm my thoughts or correct my mistake:

Example (fake #'s for simplicity; also I'm not including other deductions like shared utilities, maintenance, etc.):
Interest paid 2016: $6k
Property taxes paid 2016: $2k
Property insurance paid 2016: $1k
Rental income 2016: $8k
Pre-tax income (including rental income) 2016: $100k
Basement and upstairs are equal sq footage and equal # bedrooms, so 50/50

Option 1: Deduct for rental at 50/50 pro-rate
Interest/insurance/taxes deducted for rental: $4500
Interest/insurance/taxes deducted for the rest of home (my residence): $4500
Total deduction from income=$9k, reducing taxable income from $100k to $91k

Option 2: Do not deduct for rental (keeping in mind I will deduct for utilities, etc.)
Interest/insurance/taxes deducted for whole house: $9k
Total deduction from income=$9k, reducing taxable income from $100k to $91k

What am I missing? I doubt I can count the pro-rated amount twice, which would be the only way I can see this helping. Can anyone shed any light on this for me?

dandarc

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Re: Basement apartment rental: basic tax deduction question
« Reply #1 on: December 02, 2016, 09:23:15 AM »
Fairly certain you can't deduct home insurance on your personal return.  Whereas on  your rental it is a valid business expense so you can deduct it.  You also can deduct for depreciation and maintenance on rental property.

The other way deducting this way can help is moving the deductions from below to above the line - this can potentially help you qualify for things like the Saver's Tax Credit or a tIRA deduction.

Finally, note that itemized deductions, such as home mortgage interest and property tax deductions, are only valuable to the extent they exceed the standard deduction.  So even if your example is correct (cross insurance out, and I think it is), under option 1, you can deduct $4500 as business expenses, then $6300 standard deduction (assuming you're filing single) = $10,800.  Option 2, you're only deducting $9,000 of itemized deductions.
« Last Edit: December 02, 2016, 09:25:48 AM by dandarc »

economista

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Re: Basement apartment rental: basic tax deduction question
« Reply #2 on: December 02, 2016, 09:23:39 AM »
I can't answer your question, but I am in the same situation so I'm posting to see what the answers are.  I bought my house at the end of November last year and started renting out the upstairs in January.  This will be my first year filing with any kind of rental income, and I get a little overwhelmed when I start trying to think about it.

Disco Biscuit

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Re: Basement apartment rental: basic tax deduction question
« Reply #3 on: December 02, 2016, 09:37:22 AM »
So even if your example is correct (cross insurance out, and I think it is), under option 1, you can deduct $4500 as business expenses, then $6300 standard deduction (assuming you're filing single) = $10,800.  Option 2, you're only deducting $9,000 of itemized deductions.

This makes a ton of sense. I'm almost certain my standard deduction will be higher than the pro-rated itemized deductions on my personal residence. Totally makes the deductions worthwhile.

hucktard

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Re: Basement apartment rental: basic tax deduction question
« Reply #4 on: December 02, 2016, 02:32:42 PM »
If I remember correctly my accountant told me that the first $8K of rental income from renting a room in your house is tax free. I also rent out my basement and since I don't have a separate entrance, I consider that a room in my house. So I don't pay any taxes on that income.

Another way to think about it is that renting a room is just like having a roommate. Instead of extra income, you are simply splitting the cost of your mortgage/rent.

I am pretty sure this is kosher, but double check the tax rules for sure.

SeattleCPA

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Re: Basement apartment rental: basic tax deduction question
« Reply #5 on: December 02, 2016, 02:39:48 PM »
If I remember correctly my accountant told me that the first $8K of rental income from renting a room in your house is tax free. I also rent out my basement and since I don't have a separate entrance, I consider that a room in my house. So I don't pay any taxes on that income.

Another way to think about it is that renting a room is just like having a roommate. Instead of extra income, you are simply splitting the cost of your mortgage/rent.

I am pretty sure this is kosher, but double check the tax rules for sure.

I am pretty sure this is not kosher...

That said, maybe some fact we don't know changes things.

jviska89

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Re: Basement apartment rental: basic tax deduction question
« Reply #6 on: December 02, 2016, 02:40:28 PM »
The way to record a rental that you live in is as you described sort of. It is done on a prorated basis and the best way to split it is sqft. So if it 3000sqft and you live in 2000sqft and he uses 100sqft split it 2/3 and 1/3. You will take the 1/3 of expenses such as mortgage interest and put it on the schedule E of your 1040. All rents collected will go at the top of the Schedule E. The 2/3s that is applicable to your use will go on Schedule A mortgage interest deduction.  Note some items you cannot report on Schedule A that are allowed on Schedule E such as depreciation. Use 1/3 calculation again to depreciate the property (or utilities etc). The Schedule E bottom line figure will go to the front of the 1040. If it is a loss it will reduce your overall taxable income. If you made a profit (unlikely once depreciation is counted) you would record a higher income. Hope this helps

MsPeacock

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Re: Basement apartment rental: basic tax deduction question
« Reply #7 on: December 02, 2016, 04:55:24 PM »
I am in the same situation this year - for the first time having a renter in the basement.

Does Turbo Tax in some form handle this? I've used in the past several years and would like to continue...

Can I also deduct a portion of repairs and maintenance to the house in general, even if they were not done specifically to the basement rooms?

Thank you for all the above replies, BTW, they were helpful.