This is my first year owning a home, and renting out rooms. I'm learning, but it's complicated. I haven't found quite the same situation. I'm trying to understand tax impacts annually and at time of sale.
Details and questions:
Own and live in 3 BR home. Rent out 2 other bedrooms. So it's a personal residence and a rental property. I know the squarefoot method, but I also share all common space and property. As in my roommates use my fridge and my dishes. I'd prefer to say the total home sqft is 1/3 personal and 2/3 rented. Viable?
Improvements:
I had an insurance claim and made additional improvements. For easy numbers:
Insurance paid out $20,000. I did work myself and only spent $10,000. I assume value of replaced materials is higher than prior (very old to new). So say home value also increased $20,000. Is there any way this isn't treated as capital gains? I assume I don't get an increased cost basis bc it was insurance funded.
I did additional improvements valued at $20,000 out of pocket. Value also increased another $20,000. Is this taxed as capital gains, or does it raise my cost basis?
Depreciation and Losses:
I assume I need to depreciate. Say the non-land value of the home is ~275K. I tally a $10k depreciation expense each year? After depreciation, I'll show a net loss. I won't pay taxes on rental income now, but will pay additional capital gains when I sell, because my cost basis is lower. Correct? Are those capital gains exempt because it's a personal residence though?
I believe I can also deduct up to $25K of said loss against my W2 income. Check my logic:
This should be a passive activity loss. I'm not a "Real Estate Professional" but believe I'm active in magaging (self-tenant screening, leases, maintenence, etc. I'm married. Haven't run numbers, but gross salaries are ~$160K less 401k, mort. interest, charitable donations, etc. I'm assuming MAGI will be about $100k, but I'm not exactly sure.
Expenses:
Obviously: utilities, HOI, etc, maintenence. How detailed do I need to track this? Ideally, keeping every receipt + a spreadsheet list. But that's a lot to keep for years, and a lot of tedious work. Do rental people actually do this?
Questions are bolded for easier answering. Thanks for the help team.