Contributed by: MatthewD, FreeTaxUSA Agent, Tax Pro
With the introduction of online rental portals, some homeowners are making additional income by renting part of their home, from a single bedroom to an entire section of the house.
Renting out part of your house while you still live there can create tax complexities. For example, how do you calculate depreciation for the rental portion? In this article, we’ll help you understand how to enter your depreciable property when renting out part of your home.
Calculate the rental basis
When you use a home for both rental and personal purposes, rental expenses are generally allocated based on the percentage of the home’s total area used for the rental. You depreciate only the income-producing portion of the home, not the whole house. To do that, you need to first calculate the basis or cost of the rented portion. Here are the steps:
- Total basis: Your original purchase price, plus certain closing costs, then subtract the value of the land.
- Rental percentage: Divide the square footage of the rented room (plus a share of common areas) by the total square footage of the house.
- Prorated basis: Multiply your total basis by this rental percentage.
Example
Victoria owns a 3-bedroom townhouse that is 900 square feet. She started renting one bedroom last year at the beginning of May. She calculates the total basis by adding the original purchase price of $205,000 and her qualifying closing costs of $6,000, for a total of $211,000. The land plot was valued at $20,000 when she purchased the house, so she subtracts that amount to determine a basis of $191,000 for the home itself.
The room she rents out is 120 square feet. Victoria and her tenant also share 500 square feet of common space, including a bathroom, kitchen, laundry, and family room. Assuming that Victoria and her tenant use these areas equally, she allocates half of the shared space, or 250 square feet, to rental use.
The total rented area is therefore 370 square feet: the 120 sq ft bedroom + 250 sq ft shared space. Victoria divides 370 by 900 to calculate a rental-use percentage of 41%.
- Basis = $191,000
- Rental percentage = 41%
- Prorated basis = $78,310 ($191,000 x 0.41)
To enter this rental asset, Victoria first starts a rental income record for Schedule E by following menu path: Income > Business / Rental Income > Rental Income (Schedule E). When entering her rental expenses, she adds a depreciable asset.
She enters the information for the rented portion of the home as if it were a separate structure.
The date she had it ready to rent is the date placed in service: May 1, 2025.
Victoria enters 100% as the percentage used for business because this asset represents only the rental portion of her home. She has already accounted for the shared space by allocating half of it to rental use.
She enters the prorated basis she calculated. This is the amount used for the depreciation expense.
On the following pages, she selects Real Estate as the category.
Then she selects Residential rental property for the type of property.
The software uses this information to calculate the appropriate depreciation expense for the rental.
Conclusion
Residential rental properties are typically depreciated over a period of 27.5 years. The IRS requires you to depreciate your rental property even when a portion of your house is rented out. When you rent out only part of your home, you shouldn’t depreciate the entire house. Instead, depreciate only the portion of the home used to produce rental income.
Neglecting to do so can cause problems in the future and require you to correct previously filed returns.