How to Deduct Depreciation When You Own a Home and Rent a Room

You may deduct expenses related to renting a portion of your home.

If you are a homeowner that rents out a room or part of your home, you may be entitled to deduct a portion of your home ownership benefits including depreciation on the rented portion. The amount of your maximum deduction is subject to the "personal use limitation."

Instructions

1. Determine if the rented part of your home is subject to the personal use limitation. If you rent a room in your home and the tenant has access to common areas, such as the kitchen or bathroom, you are subject to the personal use limitation. If the rented space has its own basic living accommodations -- sleeping space, toilet and cooking facilities -- it is considered a separate dwelling and not subject to the personal use limitation. If the room is subject to the personal use limitation, you cannot deduct rental expenses that are more than the rental income. Otherwise, you can deduct the full amount of rental expenses incurred.

2. Determine expenses related to the rental portion of your home. These include real estate taxes, mortgage interest, maintenance fees and utility charges. You may also claim depreciation on the portion of the property used for rental purposes.

3. Calculate the deductible portion of these expenses. If the expense covers both the rental and non-rental portions of your home, it must be allocated between the two. The Internal Revenue Service (IRS) does not prescribe an allocation method; the two most common are based on the number of rooms in your home or on the percentage of rented square footage versus the overall home square footage. Expenses that are solely for the rented room, such as painting the room, are not allocated.

4. Calculate your depreciation expense. You can deduct depreciation only on the rental part of your property. Your basis in the property, the recovery period for the property and the depreciation method determine the amount you can deduct. If you are claiming depreciation for property placed into service during the current tax year you will calculate depreciation using IRS Form 4562. Otherwise, you may calculate depreciation using your own worksheets.

5. Report your rental income and losses on Schedule E of IRS Form 1040. Include all rental income received during the tax year. If the rental portion falls under the personal use limitation, including your rental expenses up to the amount of your rental income. If the rental portion does not fall under the limitation, you may include all rental expenses.

Tips & Warnings

• If you rent any portion of your home for less than 15 days, no portion of the income is taxable. However, you do not qualify to take deductions related to rental expenses.

References

• IRS: Publication 17, Chapter 9 -- Rental Income and Expenses
• Real Estate Tax Issues for Homeowners: Renting a Room
• MSN: Stranger in the Spare Room? Tax Break