Dear TaxGuru:

I purchased my home, new, in 2006. This year, 2012, I began renting to a roommate at $500 per month. He has a private bedroom and can use any part of my home except my bedroom. Can I claim rental expenses against rental income? If so, what percentage should use.

In 2013, I plan to sell this home. Will I be required to claim a rental property gain or loss? If so, how would I calculate the loss or gain?

Joe

“This year, 2012, I began renting to a roommate at $500 per month. He has a private bedroom and can use any part of my home except my bedroom. Can I claim rental expenses against rental income?”---->Yes you can ; as long as you're renting out a room in your home , you must also indicate whether your family used the property for personal purposes. The IRS requires you to report all income you receive as normal rent payments, as well as advance rent, payment for cancelling a lease, and expenses paid by tenants on Sch E of 1040.As a taxpayer using the cash basis method of accounting , you need to reports your rental income on yourr tax return for the year in which the payment is received, not when it's earned. In general, you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses including depreciation for managing, conserving or maintaining the property.I guess the residence is rented for 15 days or more and I sused for personal purposes for not more than 14 days or 10% of the days rented, I guess you are in this situation, , whichever is greater, your allocable rental expense are allowed only to the extent of rental income .Allocable rental expenses are deducted in three separate steps; first interest/taxes are deducted, second, utilities and maintenance expenses are deducted, third, depreciation expense is deducted .Expenses are allocated between rental and personal days before the limits are applied. The IRS requires that the allocation be on the basis of the total days of rental or personal use compared to the total days of use.The IRS limits the deduction of passive losses(if you have rental losses) from other taxable income; passive losses can’t be used to offset oether active/portfolio income. Also, any tax credits derived from passive activities can only offset income taxes attributable to passive income.
“ If so, what percentage should use.’----->As described above, I don’t think you need to find the business percentage(you do not use the room for your personal business purposes but you rent it out), compare the size of the part of your home that you use for business to your whole house. You just need to allocate rental income/expenses between rental and personal days.
‘In 2013, I plan to sell this home. Will I be required to claim a rental property gain or loss? If so, how would I calculate the loss or gain?”---->Then, you need to recapture your real estate unrecap depr;a special 25% tax rate applies to r/e gains attributable to depre previously taken and not already recaptured under sec 1245/1250rules.Any remaining gain attributable to unrecap depre previously taken is taxed at 25% as long as you have LTCG on the sale of your home;however, The IRS may permit you to exclude up to $250,000, $500,000 if you are married and file jointly, of gain from the sale of your home. This means that you do not have to pay income taxes on the appreciation of your primary residence. To exclude the gain, you must have owned the home for a period longer than two years and it must have been your primary residence for the same period of time. However, the two years, or 24 months, of residency can occur over a period of five years, or 60 months. You cannot have excluded the gain on the sale of another residence during the previous two years to currently use this exclusion also. The IRS does not permit you to claim the loss as a tax deduction to offset the gains from other assets.

Wnhough :

If I understand you correctly, because I use the home 365 days per year for personal use and rent out one room of this house, I am only allowed to deduct rental expenses to the extent that the percentage of the rental bedroom comprises the total square feet of my home even though my tenant uses the entire house.

Second, when I sell my home next year, and if I incur a loss, I will not be allowed to offset my regular income with said loss even though some portion of this home was used for rental purposes.

Joe

“because I use the home 365 days per year for personal use and rent out one room of this house, I am only allowed to deduct rental expenses to the extent that the percentage of the rental bedroom comprises the total square feet of my home even though my tenant uses the entire house.”--->Sorry it is my bad;you are correct.Since you rent a portion of your own home,the bedroom, you are eligible to deduct part of your home owner's expenses, such as, real estat taxes, interest, utilities/repairs / depreciation/ insurance, from the gross rental income amount you are required to pay income taxes on. To determine this amount, you need to determine the percentage of your home you are renting out.You need to determine the square footage of your home that you rented out. For example, if you rented one 10-foot by 20-foot room, you would be renting out 200 sq.ft. and youneed to divide the amount rented out by the total square footage of your home to determine the percentage of your home you rented out. For example, using the number above, if your house had a total 2,000 square feet, you would be renting out 10 percent of the home. To determine your expenses, you should multiply the percentage of your home that you rent out by the total expense for your home. For example, if your homeowner's insurance cost you $1,000 per year and you rented out 20 percent of your home, you could include $200 as a rental expense. When renting out a room in your house, you can take advantage of some tax deductions. The IRS allows you to deduct a portion of your home expenses. For example, you can take a deduction for a portion of your mortgage payment, your utility bills and any other expenses that are related to the rental. You will have to divide out the expenses between personal and rental expenses. Aslong as an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between rental use and personal use. You can use any reasonable method for dividing the expense. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. The two most common methods for dividing an expense are the number of rooms in your home, and the square footage of your home as said above.
“Second, when I sell my home next year, and if I incur a loss, I will not be allowed to offset my regular income with said loss even though some portion of this home was used for rental purposes.”-----> You cannot deduct a loss on the sale of your home on your personal tax return; you can, however, deduct a loss on the sale of rental property. When selling a rental house at a loss, the loss may actually turn out to be smaller than you’d expect. While you were renting it out, as said previously,you were most likely depreciating the cost of the bedroom rented out on Sch E. When you sell the house, your cost basis in the house is reduced by the amount of depreciation you’ve taken, which makes for a smaller loss. In contrast, a loss from the sale of a rental property is tax deductible as an ordinary loss. Ordinary losses are deductible in full against your ordinary income ,i.e., your wages and interest you earn or etc.