Discussion:Home rental common area
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Discussion Forum Index --> Tax Questions --> Home rental common area
| 18 December 2007 | |
| Client is renting out one bedroom in his home.
The square footage of the bedroom that the tenant will have private access to is 10% of total. There is no separate entrance. In addition, the tenant will have access to the common area, along with my client the homeowner, including the kitchen, living room, etc. The tenant will pay rent plus 1/2 of the utilities. I'm thinking that technically, the utilities paid for by the tenant are income to my client, and that he can only deduct 10% of the total utilities, plus the depreciation will be based on the 10%. How do you all treat such situations? Thanks | |
Death&Taxes (talk|edits) said: | 18 December 2007 |
| I agree, having gone through this in a case my ex-boss conceded before trial in Tax Court. There were too many citations at that time against us. | |
| 18 December 2007 | |
| I have had a hard time figuring out how to treat "roommate" rentals.
According to JK Lasser, a court case (no site) denied a loss, claiming that since the rented rooms were not separate and distinct from the rest of the house, the house was a single dwelling unit shared by the owner and tenants, and under the personal use rules, the owner could not claim the loss. When I asked one CPA he said "You have a client that reports this?". Not much help. Others have said, and IRS pubs (not code I know) have suggested that we need to use the vacation home rules to do this properly. How are others handling this? | |
| 18 December 2007 | |
| I would use the vacation home rules. But most people would not report this. Definately, no loss is available. | |
Death&Taxes (talk|edits) said: | 18 December 2007 |
| "If you rent only a part of your property, you must divide the expenses between the part used for rental purposes and the part used for other purposes. You may use any reasonable method for dividing the expenses, but a method based on square footage is usually the most accurate." http://www.irs.gov/taxtopics/tc414.html
Vacation rental is based on days rented, not on percentage. The preamble to Topic 414 speaks of the tax gap caused by non-reporting of rental income. | |
| 19 December 2007 | |
| I found a case, TC Memo-2006-33, under which taxpayers had a B&B & had to allocate the areas used both by them and their customers as 100% personal. (They had allocated based on the time they used the dual-use areas for personal purposes, as per child care rules.)
They lost interest and depreciation deductions, having to reduce the business % from 85% down to 77% but the interesting part is that there was no mention of their losing utilities, insurance, property taxes, or repairs & maintenance deductions as a result of the change in calculation of the personal use %. Perhaps they were allowed to use the "any reasonable method" referred to in Tax Topic 414 that Death & Taxes had found. | |
Death&Taxes (talk|edits) said: | 19 December 2007 |
| Smokey, the case I had to take over was a classic: the owner had deducted 50% rental but IRS would allow 16%. I sat there and heard the taxpayer say he never cooked or used the kitchen because he was always out playing the ponies, and he never watched television in the living room. The Appeals officer asked, "you mean you never had a bottle of beer when you came home? You never watched the Kentucky Derby. Tell that to the Tax Court judge." This was in the mid-80s so the cases were very old, but I believe the principle holds true today. | |
| 19 December 2007 | |
| Thanks, D&T - I just wanted to make sure I'm not shortchanging the client. | |
| 24 February 2008 | |
| I wonder what % of the people who take in a boarder to make ends meet report this. It is really unfair to not be able to split the costs 50/50 as the boarder is not just confined to the bedroom - the boarder uses the entire house on an equal basis. And with all of the major fraud and tax evasion going on, why would the IRS even bother. | |
