renting part of house

[Kea]

I know I should know this, but I haven't had to deal with this scenario in my previous rentals.

Client owns house. 1 bedroom and 1 bathroom (15% of house) are used exclusively by her. A 2nd bedroom and 2nd bathroom (another 15% of house) are used exclusively by renter. Remainder of house (kitchen, living room, laundry room, etc.) is used by both. These are the only 2 people living in the house. Rooms were rented all year. This is a new client who has previously reported 1/2 of all her house related expenses as rental expenses. She has claimed all of her losses. I know this isn't right.

I believe that she should only take 15% of all expenses and that losses (up to $25K) are allowed, and that nothing is allowed for the 70% of house they share. Is this true?

Or, would I report 2 units on Sch E. the 1st as 15% and allow losses with the 2nd one being 35% (1/2 of the 70% shared) and only taking expenses up to the income? If so, I guess I could proportion out the rental income 30 / 70. If I use this 2nd method, would I depreciate the shared area?

Thanks,

At least this is all over tomorrow (for a few months).

[Pacun]

It seems to me that the house is half rented and half occupied by the owner. Exclusive use is a requirement for Office in Home... NOT for rental property.

[Kea]

I thought the personal use came into play in determining how much of the losses could be claimed. For the exclusive part, I believe the losses can exceed the income. It's the shared part of the house where I am confused as to what expenses, if any, I can take.

I've been reading Quickfinders, Pub 17 & Pub 527 as well as the Morcos TC Summary Opinion 2001-114 and feel like I am going in circles. The Morcos Opinion seems to fit my situation best but the summary I read didn't seem to explain exactly what the court allowed and didn't allow. Is there a good place to find this?

Thanks

[LSmith33]

I have a client with a similar situation. Originally I had been taking a loss on the property, but then I read Publication 527. On Page 5, under Personal Use of a Dwelling Unit, it states "If you used a dwelling unit for personal purposes, it may be considered a 'dwelling unit used as a home." If it is, you cannot deduct rental expenses that are more than your rental income for the unit."

On page 6, it lists the Dwelling Unit Used as a Home, with some examples that seem to fit your scenario. I felt that it fit my client's and I stopped deducting the losses and actually went back and amended the prior returns. The client and his tenant both occupied one bedroom each and then the rest of the house was 50/50. I split the mortgage, taxes, utilities, etc. 50/50 and also claimed depreciation for 50%. However, I did not take a loss as stated in Publication 527.

I haven't looked at the Morcos TC Summary so I don't know what information that gives.

Hope this helps!

~Laura J. Smith, EA

[Kea]

But 2 rooms are exclusively rental. I'm pretty sure I can take losses for that part. It sounds like for the shared part, you would take the expenses, but not the loss.

Thanks.

[MAMalody]

While it has been a number of years since I was an auditor for the IRS, I have always interpreted the rented room in a personal residence as a no loss situation, period. It did not matter if the room rented out was used exclusively for rental or not. I have not had this issue for seven or eight years as a practitioner, so I am open to instruction - however, I would like to see a court case or something substantive for the position being put forth that the exclusive use of the rooms would enable to be declared as a rental loss. Thanks fo the help in my understanding this issue.

Mike

[Kea]

Quickfinders made reference to the Morcos TC Summary Opinion 2001-114. I Googled it and found some information, but could not find the complete decision. In this case, the taxpayer & spouse rented out 3 rooms on their 3rd floor for exclusive use by the tenants. They also rented out a carriage house (exclusive). They took deductions for the 3 rooms, the carriage house, a portion of the 1st floor (that was used by all), and portions of the upgrades they made to the grounds. The court disallowed the grounds and allowed the carriage house. I could not find the decision relating to the 3rd floor (exclusive) or 1st floor (shared). This case seems to fit my situation, but I can't find the portions I need.

Is there someplace I can find what they decided on these other aspects?

Thanks.

[MAMalody]

Allowing the carriage house makes sense because it is probably a separate structure, not utilized by the owner.

Try http://www.legalbitstream.com/ for your research.

MIke

[BulldogTom]

Try http://www.legalbitstream.com/ for your research.

I don't know who first posted that site on here, but Legalbitstream is a great website and everybody ought to bookmark it. I have had great success with my research using it.

Thanks to whoever shared that great website.

Tom

Lodi, CA