Musings of a Career Consultant

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10 Expenses You Can Deduct When Renting Out A Room August 7, 2012

Stephen Fishman wrote this great article for Inman News and wanted to share. I’ve rented a room from people and I don’t think they’ve ever taken advantage of these write-offs. I’m giving you money *and* making you money… that’s what I would call a Win-Win 🙂

Lots of people are trying to earn a few extra bucks by renting out a room in their home. This can not only be a good source of income, but result in tax deductions.

If you rent out a room in your home, the tax rules apply to you in the same way as they do for landlords who rent out entire properties. This means you get to deduct the expenses arising from your rental activity.

There is one big difference, however: You must divide certain expenses between the part of the property you rent out and the part you live in, just as though you actually had two separate pieces of property.

You can fully deduct (or, where applicable, depreciate) any expenses just for the room you rent; for example, repairing a window in the room, installing carpet or drapes, painting the room, or providing your tenant with furniture (such as a bed).

In addition, if you pay extra homeowners insurance premiums because you’re renting out a room, the full cost is a deductible operating expense.

If you install a second phone line just for your tenant’s use, the full cost is deductible as a rental expense. However, you cannot deduct any part of the cost of the first phone line even if your tenant has unlimited use of it.

Expenses for your entire home must be divided between the part you rent and the part you live in. This includes your payments for:

  • mortgage interest.
  • repairs for your entire home; for example, repairing the roof or furnace, or painting the entire home.
  • improvements for your entire home; for example, replacing the roof.
  • homeowners insurance.
  • utilities such as electricity, gas and heating oil.
  • housecleaning or gardening services for your whole home.
  • trash removal.
  • snow removal costs.
  • security system costs.
  • condominium association fees.

You can also deduct depreciation on the part of your home you rent.

You can use any reasonable method for dividing these expenses. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. However, the two most common methods for dividing an expense are either based on the number of rooms in your home or based on the square footage of your home.

Example 1: Jane rents a room in her house to a college student. The room is 10 by 20 feet, or 200 square feet. Her entire house has 1,200 square feet of floor space. Thus, one-sixth, or 16.67 percent, of her home is rented out. She can deduct as a rental expense one-sixth of any expense that must be divided between rental use and personal use.

Example 2: Instead of using the square footage of her house, Jane figures that her home has five rooms of about equal size, and she is renting out one of them. She determines that one-fifth, or 20 percent, of her home is being rented. She deducts 20 percent of her expenses that must be divided between rental and personal use.

As the examples show, you can often get a larger deduction by using the room method instead of the square footage of your home.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including “Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants,” “Deduct It,” “Working as an Independent Contractor,” and “Working with Independent Contractors.” He welcomes your questions for this weekly column.

 

Oh, what a year it’ll be… February 7, 2011

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It’s hard to believe we’re already a week into the 2nd month of this year! I feel older and older every time I say this but it feels like only yesterday… that we were scared of Y2K, that my niece was born, that my best friend got engaged! And, yet, it’s been 11 years since Y2K was supposed to eat us alive, my sweet little niece will be 4 in May and my best friend is getting married in June (and my sister’s right behind her in September)! My favorite thing about this year is all of the positive energy I’m getting everywhere I go. Upbeat REALTORS, happy Buyers, gracious Sellers, it’s awesome!

 

CAR is trying to help where it can. We’ve got some great legislation (SB 931) that just came through that totally protects you from a deficiency judgment on your 1st… your 2nd is a different story. It may or may not be protected. As always, make sure you, your REALTOR and your tax (wo)man are working together to make sure you’re covered!

 

And, if you’re a REALTOR, and not disclosing EVERYTHING on the HUD, you are opening yourself up to trouble. Just remember this, Not on HUD = FELONY! You read that right! If you do anything that isn’t on the HUD (i.e. the Bank is not aware of), it is a Felony! It’s totally not worth it! Just ask! Most Short Selling Banks are getting really awesome! Just ask and you may receive! Smile

 

Lead Based Paint is always fun and interesting… fun fact, only 24% of homes built 1940-78 have Lead Based Paint but a whopping 88% of the homes built prior to then do! Make sure that if you’re doing anything paint related on a home built prior to 1978 that you’re enlisting EPA certified help! That includes you, Landlords! If you’re not certified and your Tenants find out, you could be in a heap of trouble! Who’s exempt? Studios and Senior Housing… Unique pair to be excluded, eh?

 

There’s a new paragraph in the Listing Agreement regarding Internet Display of a Seller’s home. They can opt out of having it on the internet but that means that no Buyer looking anywhere (not even your website, Listing Agent!) can see it. In a day and age, when most Buyers start their search online, isn’t this more of a hindrance than anything? Also, you can opt out of people being able to comment or talk about your home online. I always give my Sellers that option (See CAR form SEL).

 

With the facelift on certain CAR forms, of course our all-inclusive CAR form SBSA had to be updated. You’ll know if you’ve signed this one… it’s a whopping 10 pages long! My Buyers and Sellers are always most wary of this one but it really is just an advisory… no need to be scared, guys! My favorite part? They are no longer just advising you about potential golf balls but all golfing related noise… how rowdy are you golfers getting?!

 

A form did go away! Yay! They had CAR form WHSD incorporated with the TDS! Also, note on the TDS that it now asks about Carbon Monoxide detectors. The law regarding them (to be enforced starting July 1st) is still a little vague but CAR’s hoping that when the Board of Directors pop up to Sacramento in May that we’ll have a more clear idea of what they’re requiring. Right now, we’re just suggesting 1 per home but it might be different once we get them to clear it up a bit.

 

What else is a Felony you may ask? Not using CAR form NODPA when you’re supposed to. If you don’t know when to use it, you need to learn!

 

If you commit a “Fraudulent Felony” as a Loan Broker, you will be banned for life from the CA DRE. In the immortal words of Squints from The Sandlot “For-E-Ver”! Gosh darned, I love that movie!

 

And, last but not least, in order for Adverse Possession to work, you have to pay the taxes on the property for 5 five years, then you can claim the property as your own.

 

There will be a lot coming up over the next few months, so sit tight and enjoy our absolutely, amazingly, gorgeous SoCal weather… I think I’m in love! Bring on more of it!