Author Topic: Complicated (Fun?) Real Estate Tax Question(s) - Personal Home Room Rental  (Read 986 times)

jc4

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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.

jc4

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Re: Complicated (Fun?) Real Estate Tax Question(s) - Personal Home Room Rental
« Reply #1 on: December 03, 2018, 01:11:39 PM »
Why no responses? Too many questions? Or too long and not interesting?

walkwalkwalk

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Re: Complicated (Fun?) Real Estate Tax Question(s) - Personal Home Room Rental
« Reply #2 on: December 03, 2018, 01:17:16 PM »
Accountants don't like what you're doing and most wouldn't find it worth their while.

jc4

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Re: Complicated (Fun?) Real Estate Tax Question(s) - Personal Home Room Rental
« Reply #3 on: December 04, 2018, 10:38:11 AM »
Thanks. I was assuming I'd still do it with Turbotax. 

I'm supposed to report the rent as income, but when I started loooking into how to do taxes correctly, it quickly gets to way more complicated than it should be.

I'm an engineer, so I'm good with numbers, but jusst don't have any experience here. I was hoping the community would have enough best practices that'd I'd get a piece-meal answer.

wbranch

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Re: Complicated (Fun?) Real Estate Tax Question(s) - Personal Home Room Rental
« Reply #4 on: December 04, 2018, 12:20:57 PM »
It sounds like you have it mostly figured out.

I think best practice is that nothing is deductible for the shared/common areas. Only deduct for the areas exclusively used by the renters. Bedroom(s), bathroom(s), hallway, possibly a living area. Use that ratio for all shared expenses: utilities, depreciation, taxes, interest, insurance, etc.

There is no capital gain on an increase in home value. Those are unrealized gains, nothing taxed until you sell. Your improvements are added to your cost basis. For the insurance claim take the net of the insurance proceeds/improvements and that will end up lowering your basis.

Depreciation is also adjusted based on sq footage of the rental. You still qualify for the personal residence exemption but you will still be taxed on the depreciation recapture.

If you meet the MAGI limit you will be able to deduct the rental loss.

You should keep receipts/invoices and summary/list of expenses. I am sure not every landlord does that but it is easy enough to do if you setup a system.

jc4

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Re: Complicated (Fun?) Real Estate Tax Question(s) - Personal Home Room Rental
« Reply #5 on: December 05, 2018, 09:47:05 AM »
@wbranch This is exactly what I wanted.

I think best practice is that nothing is deductible for the shared/common areas.


I got that impression, but it seems permissible to do otherwise. I hoped to hear some examples. The bedrooms are small, so using this method I'd only have 20% as exclusive use to renters. But only about 20% will be exclusive use to myself. I'll do more googling, and maybe post a more specific thread on this question if it hasn't been answered before.

Everything else you said sounds very fair and resonable. It'll take some tracking to set up, but I think I'm good.

bacchi

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Re: Complicated (Fun?) Real Estate Tax Question(s) - Personal Home Room Rental
« Reply #6 on: December 05, 2018, 10:56:20 AM »
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?

Only the square feet exclusive to the tenants can be depreciated, from what I can tell. You can also deduct/depreciate a prorated part of any repairs and improvements and appliances.

https://ttlc.intuit.com/questions/3568784-renting-out-a-bedroom-living-in-the-other-can-i-deduct-depreciate-any-of-my-household-remodeling-expenses-while-it-is-also-my-full-time-residence

Quote
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?

This raises the property's cost basis.

But I'd be careful of raising the cost basis $20k when you only spent $10k. The IRS doesn't consider personal labor in determining cost basis.


Quote
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?

You can only depreciate the rooms used by tenants. If the non-land value is $275k, and the tenants use 20%, you'll depreciate from $55k. Yeah, it's not much when spread out over 27.5 years.

When you sell, only the "personal" use of your home can be excluded from cap gains. That is, if you sell and make $200k profit, only 80% is tax-free. The other 20% used by your tenants is a cap gain. You also pay back the depreciation, of course.


Quote
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?

Yes. I keep it in a spreadsheet and create a new one each year.

11/2 prorated gas bill                              $7
11/3 new blinds for tenant bathroom        $35
[...]
12/31 2018 prorated property taxes          $1000

The beautiful thing of having tenants is that 20% of any improvement costs may be immediately deductible (and not capitalized) using the de minimis safe harbor. Add some insulation in your attic? It's 20% off if the cost is below $2500. New front door? Same. You can improve your house at a substantial discount.
« Last Edit: December 05, 2018, 11:09:34 AM by bacchi »