9.4 Reporting Rents From a Multi-Unit Residence

If you rent out an apartment or room in a multi-unit residence in which you also live, you report rent receipts and deduct expenses allocated to the rented part of the property on Schedule E of Form 1040 whether or not you itemize deductions. You deduct interest and taxes on your personal share of the property as itemized deductions on Schedule A of Form 1040 if you itemize deductions. If you or close relatives personally use the rented portion during the year and expenses exceed income, loss deductions may be barred under the personal-use rules (9.7).

EXAMPLE

You buy a three-family house in March 2012. You occupy one floor as your personal residence and starting in June 2012 you rent out the other two floors. The house cost you $300,000 ($270,000 for the building and $30,000 for the land). Two-thirds of the basis of the building is subject to depreciation, or $180,000 (²/₃ of $270,000). For a building placed in service in June, the depreciation rate is 1.970%, as shown in Table 9-1, so your depreciation deduction is $3,546 (1.970% $180,000). Assuming you paid property taxes of $6,000, mortgage interest of $3,900, and repairs of $3,000, this is how you deduct expenses for 2012:

Table 9-1 Depreciation: Use the Row for the Month the Residence Is Ready for Rental in the First Rental Year

The taxes and interest allocated to personal use are deductible on Schedule A of Form 1040 if you itemize deductions. Repairs allocated to your apartment are nondeductible personal expenses.

---

Court Decision

Rented Rooms That Are Not Separate Dwelling Units

A rental loss was denied to an owner of a two-story, four-bedroom house when he rented out two bedrooms to separate tenants after he lost his job. Although individual locks were placed on the doors of the rented bedrooms, the tenants and the owner shared access to the kitchen, bathroom, and other parts of the house. The Tax Court held that the rented rooms were not separate and distinct from the rest of the house that the owner used. The house was a single dwelling unit shared by the owner and tenants and under the personal-use rules (9.7), the owner could not claim a rental loss.

- - - - - - - - - -

Even if a loss is not barred by the personal-use rules (9.7), a loss shown on Schedule E is subject to the passive loss restrictions discussed in Chapter 10. The loss, if it comes within the $25,000 allowance (10.2) or the exception for real estate professionals (10.3), may be deducted from any type of income. If your only passive activity losses are rental losses of $25,000 or less from actively managed rental real estate and your modified adjusted gross income is $100,000 or less, you do not have to use Form 8582 to deduct losses under the $25,000 allowance (10.12). If you are not a qualifying real estate professional and cannot claim the allowance, the loss may be deducted only from passive activity income.