Utility adjustments for rental income
Last year I purchased my first home and this year in late summer I started renting a bedroom to a traveling nurse. I charge a fixed monthly rate and don't charge separately for utilities. I have looked at schedule 527 but I am still confused as to how to deduct or take credit for utility expenses (calculating by square feet? (we share common areas) or number of (bed)rooms, or number of people in the house?) Will I have to itemize deductions, or what is the tax process for applying rental income towards utility expenses? I also would like to know if there are credits for applying rental income towards real estate tax and how to calculate depreciation.
Answers
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Generally, the best way to divide up the utilities cost for the home is by square footage. For example, if the entire home is 2,000 sq ft and the room rented out is 200 sq ft, then 10% of the utility bill would be considered a rental expense on your Schedule E. The Schedule E for rental income and expenses is found in the Income tab > Rental Income section.
There are no credits for applying rental income towards utilities expenses, but the utilities expenses are a deduction against your rental income.
Depreciation is calculated automatically by our software once the property is entered in the Income tab > Rental Income section.
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Hello, Vera!
That is a great question!
Do you mean Publication 527? If so, this can be a great place to look for answers to your questions. Unfortunately, it can also be convoluted.
In general, you can deduct the portion of expenses attributable to the rental portion. The most common way to do this is by square footage. You can take half of the square footage for spaces that are shared. Make sure you keep records as to how you determined the portion of utilities attributable to the rental portion. Be sure you only prorate the expenses incurred after you began renting the bedroom.
You don't need to itemize your deductions to deduct expenses for the rental portion of your home from your rental income. You will report your rental income and expenses on Schedule E. The Schedule E figures your net gain/loss from the rental activity.
You can claim a portion of the real estate taxes as a rental expense on Schedule E. Our software will calculate depreciation for you when you enter the home as a depreciable asset within Schedule E. In general, residential real estate has a depreciable life of 27.5 years. You can only depreciate the rental portion. It's easiest if when entering your asset to enter 100% used for business and then prorate the total basis yourself. For example, if half of your home is used for rental purposes and the basis of your total home is $500,000, you'll enter $250,000 as the basis when entering the home in FreeTaxUSA.
