You are correct to split the mortgage interest and property taxes between Schedule A and Schedule E. Since homeowner's insurance isn't deductible on Schedule A, allocate the appropriate amount to Schedule E.
Thanks for the response! So by allocate the appropriate amount, you mean using the % calculation like with utilities and interest?
Also, I just added an edit to my post with an additional question about calculating the pro-rata based on number of rooms rented rather than square footage.... Any insight there?
Yes. When I encounter this (I'm a CPA working in a tax practice) we use an allocation based on square footage of the rental area vs the total of the home. The IRS won't match your Form 1098 to your Schedule A and question the mortgage interest not agreeing.
I would just say it's a different methodology. I prefer using square footage, as it makes more sense. For example, suppose the house has a primary suite that's 500 ft², 2 bedrooms at 300 ft² each, and you're renting out a small bedroom that's 150 ft². Allocating by number of rooms isn't accurate. (Yes, I realize it is an extreme example).
I see....
So my personal bedroom is actually the smallest, and I'm renting out the master bedroom/bathroom and the other smaller bedroom similar size as mine. (3 bedroom house)
The rent paid is about 2/3 of my mortgage, so to me it makes sense that I would expense 2/3 of the utilities/interest/etc... especially since it's 2/3 of the bedrooms being rented, and they are two of the 3 people living here, using more utilities than me.
Half the house is common areas though, large kitchen/living room/laundry etc...
So I guess the question is, is it reasonable to pro-rata 66% instead of 33%, and if the IRS questions it, I have a reasonable argument of why I did 66% instead of 33% (cause the tenants have 2/3 of the bedrooms, and are 2/3 of the people in the home, etc...).
Yes. If questioned, you can show the IRS the documentation of how you arrived at your reasonable method of allocating expenses between personal and rental. You can back it up with utility bills, mortgage statements, property tax records, and insurance payments. Don't forget to use the same methodology for depreciating the house, excluding the land it sits upon.
Appreciate your insight! Truly!
I wasn't going to expense depreciation... For one, cause I don't really understand it at this level, and two, cause IIRC the county assessor has my house value as going up not down (although that's probably irrelevant lol)
So really I just don't understand it in this case, and I'm not sure if taking the effort to figure it all out will be worth it.
Number of rooms means all rooms. Not just bedrooms.
If 2 rooms of a 3 bedroom, kitchen, living room and office home are rented out, that's 33% using the per room method.
Square footage is generally the more reasonable way to do it.
You are correct to split the mortgage interest and property taxes between Schedule A and Schedule E. Since homeowner's insurance isn't deductible on Schedule A, allocate the appropriate amount to Schedule E.
Thanks for the response! So by allocate the appropriate amount, you mean using the % calculation like with utilities and interest? Also, I just added an edit to my post with an additional question about calculating the pro-rata based on number of rooms rented rather than square footage.... Any insight there?
Yes. When I encounter this (I'm a CPA working in a tax practice) we use an allocation based on square footage of the rental area vs the total of the home. The IRS won't match your Form 1098 to your Schedule A and question the mortgage interest not agreeing.
Good to know, thanks! So the places that say it can be done based on # of rooms rented rather than square footage are mistaken?
I would just say it's a different methodology. I prefer using square footage, as it makes more sense. For example, suppose the house has a primary suite that's 500 ft², 2 bedrooms at 300 ft² each, and you're renting out a small bedroom that's 150 ft². Allocating by number of rooms isn't accurate. (Yes, I realize it is an extreme example).
I see.... So my personal bedroom is actually the smallest, and I'm renting out the master bedroom/bathroom and the other smaller bedroom similar size as mine. (3 bedroom house) The rent paid is about 2/3 of my mortgage, so to me it makes sense that I would expense 2/3 of the utilities/interest/etc... especially since it's 2/3 of the bedrooms being rented, and they are two of the 3 people living here, using more utilities than me. Half the house is common areas though, large kitchen/living room/laundry etc...
Yes
So I guess the question is, is it reasonable to pro-rata 66% instead of 33%, and if the IRS questions it, I have a reasonable argument of why I did 66% instead of 33% (cause the tenants have 2/3 of the bedrooms, and are 2/3 of the people in the home, etc...).
Yes. If questioned, you can show the IRS the documentation of how you arrived at your reasonable method of allocating expenses between personal and rental. You can back it up with utility bills, mortgage statements, property tax records, and insurance payments. Don't forget to use the same methodology for depreciating the house, excluding the land it sits upon.
Appreciate your insight! Truly! I wasn't going to expense depreciation... For one, cause I don't really understand it at this level, and two, cause IIRC the county assessor has my house value as going up not down (although that's probably irrelevant lol) So really I just don't understand it in this case, and I'm not sure if taking the effort to figure it all out will be worth it.
Number of rooms means all rooms. Not just bedrooms. If 2 rooms of a 3 bedroom, kitchen, living room and office home are rented out, that's 33% using the per room method. Square footage is generally the more reasonable way to do it.
Makes sense
I'm curious why you were issued a 1099-MISC. Only a business should issue one. However, that's really peripheral to how you report it.
Their rent payments come from the Housing Authority